University of Bern, Dept. Psychology
CH-3012 Bern, Switzerland
Institutional Affiliation: University of Bern
NBER Working Papers and Publications
|May 2017||The Effect of Prior Choices on Expectations and Subsequent Portfolio Decisions|
with Camelia M. Kuhnen, Bernd Weber: w23438
We document that prior portfolio choices influence investors' expectations about asset values, and their future choices. We find that people update more from information consistent with their prior choices, leading to sticky portfolios over time. These effects are related to how the brain's valuation centers encode new information about assets and about the trader's own success. These findings provide microfoundations for theoretical models where agents learn jointly about their skill and about asset values, leading to disagreement, and offer a common explanation for several puzzling investor behaviors, specifically, households' low stock market participation rate, and the disposition and repurchase effects.