Getting Better or Feeling Better? How Equity Investors Respond to Investment Experience

Abstract

Using a large representative sample of Indian retail equity investors, many of them new to the stock market, we show that both years of investment experience and feedback from investment returns have significant effects on investor behavior, favored stock styles, and performance. We identify two channels of feedback: performance relative to the market, and the directly experienced returns to behavior and styles of stock. Both of these vary across investors at a point in time because investors are imperfectly diversified and receive idiosyncratic returns. We find that experienced investors generally behave in a manner more consistent with the recommendations of finance theory, although this tendency is weakened by strong investment performance. High trading profits increase turnover, while high returns to equity styles have a short-term negative and a longer-term positive effect on investors' style demands, possibly reflecting the offsetting effects of disposition bias and style chasing. We document high returns on a portfolio of stocks held by experienced investors, and on individual Indian stocks with an experienced and low-turnover investor base.

The Effect of Prior Choices on Expectations and Subsequent Portfolio Decisions

“…As a result, investors will become over-confident about their talent, and will put too much weight on past successes when deciding their future choices. This prediction is in line with the recent empirical evidence in Campbell, Ramadorai, and Ranish (2014), who use detailed data on household investment choices and provide evidence that people repeat investment behaviors that happen to have performed well for them in the recent past. The authors propose that this might be due to people "feeling better" about themselves after receiving positive feedback about prior investment decisions, but the data do not allow them to investigate the exact mechanism driving households to repeat past winning actions.…”

Exploring the Trust Influencing Mechanism of Robo-Advisor Service: A Mixed Method Approach

“…Firm reputation is a significant factor in gaining customers' trust. On one hand, a positive firm reputation indicates a satisfying fulfillment of company's prior obligation [67]. On the other hand, reputation is the representation of public opinion, which can shape customer's first impressions of a firm [68].…”

“…On the other hand, reputation is the representation of public opinion, which can shape customer's first impressions of a firm [68]. Consumers tend to conclude that transacting with firms with positive reputation is low-risk, while transacting with firms with negative reputation is uncertain and high-risk [67]. Therefore, positive firm reputation can reduce uncertainty and increase customers' trust [69].…”

Restoring Rational Choice: The Challenge of Consumer Financial Regulation

“…For example, Choi et al (2009) show that households save more in response to high idiosyncratic returns in their 401(k) accounts, consistent with the idea that they extrapolate these returns into the future. Campbell, Ramadorai, and Ranish (2015) and Huang (2015) show that households increase their investment activity and portfolio tilts to equity styles and industries, respectively, in which they have experienced high returns on the particular stocks they picked within those styles and industries.…”