Investor Experiences and Financial Market Dynamics

Abstract

for excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Asset Pricing with Fading Memory

“…In addition to the paper by Collin-Dufresne, Johannes, and Lochstoer (2017) that we discussed above, a number of other recent papers take an overlapping generations approach to study learning from experience effects in asset pricing. While this approach can deliver interesting insights into the heterogeneity between cohorts, these models can be solved only with stark simplifications that affect the aggregate asset pricing implications: Ehling, Graniero, and Heyerdahl-Larsen (2018) assume log utility, Schraeder (2015) and Malmendier, Pouzo, and Vanasco (2017) work with CARA preferences in partial equilibrium with an exogenous risk-free rate, and the model in Nakov and Nuño (2015) has risk-neutral agents. By abstracting from cross-cohort heterogeneity, we also employ a simplified approach, but one that delivers quantitatively realistic asset-pricing predictions.…”

Asset Pricing with Fading Memory

“…In addition to the paper by Collin-Dufresne, Johannes, and Lochstoer (2017) that we discussed above, a number of other recent papers take an overlapping generations approach to study learning from experience effects in asset pricing. While this approach can deliver interesting insights into the heterogeneity between cohorts, these models can be solved only with stark simplifications that affect the aggregate asset pricing implications: Ehling, Graniero, and Heyerdahl-Larsen (2018) assume log utility, Schraeder (2015) and Malmendier, Pouzo, and Vanasco (2017) work with CARA preferences in partial equilibrium with an exogenous risk-free rate, and the model in Nakov and Nuño (2015) has risk-neutral agents. By abstracting from cross-cohort heterogeneity, we also employ a simplified approach, but one that delivers quantitatively realistic asset-pricing predictions.…”

Combating the COVID-19 pandemic: The role of disaster experience

“…Studies show that early experiences affect the subsequent economic activities of individual investors in areas such as their careers ( Oyer, 2008 ; Law and Zuo, 2021 ), corporate decision-making ( Malmendier et al, 2011 ; Schoar and Zuo, 2017 ), risk aversion ( Cain and McKeon, 2016 ; Bernile et al, 2017 ), and portfolio choices ( Knüpfer et al, 2017 ; Malmendier et al, 2020 ). Chernenko et al (2016) point out that inexperienced investors tend to ignore risks until they experience severe investment losses.…”

“…First, we contribute to the literature on the effects of experiences on subsequent economic activity. Studies in one stream of research show that the imprints of past experience can influence individuals’ careers ( Oyer, 2008 ; Law and Zuo, 2021 ), corporate decision-making ( Malmendier et al, 2011 ; Schoar and Zuo, 2017 ), risk aversion ( Cain and McKeon, 2016 ; Bernile et al, 2017 ), and portfolio choices ( Knüpfer et al, 2017 ; Malmendier et al, 2020 ). Distinct from these studies, which focus on the social and economic effects of past experience, we evaluate the role of disaster experience in responding to and combating the COVID-19 pandemic.…”