Investor Memory

How does memory shape individuals’ financial decisions? We provide experimental evidence of a self-serving memory bias. Individuals over-remember positive investment outcomes of their chosen investments and under-remember negative ones. In contrast, individuals who did not choose their investments or did not invest but merely observed outcomes do not have this bias. The memory bias affects individuals’ beliefs and decisions to re-invest. After investing, subjects form overly optimistic beliefs about their investment and re-invest even when doing so leads to a lower expected return. Our findings contribute to the understanding of how people learn from
their experiences in financial markets. More generally, the documented memory bias offers a consistent explanation for stylized facts about investor behavior as well as dynamic risk taking in many economic domains.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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