The Leibniz Institute SAFE and the Finance chair at the Goethe University organize a brown bag seminar on
Investor Memory and Biased Beliefs: Evidence from the Field (joint work with Zhengyang Jiang, Hongqi Liu, and Hongjun Yan)
Cameron Peng (LSE)
Abstract: We survey a large representative sample of retail investors to elicit their memories of stock market investment and return expectations. We then merge the survey data with administrative data of transactions to test a model in which investors form expectations by selectively recalling past experiences similar to the present cue. Our analysis not only uncovers newstylized facts about investor memory, but also provides support for similarity-based recall as a key mechanism of belief formation in financial markets. Market fluctuations affect investors’ recall: positive market returns cue investors to retrieve episodes of rising markets and recall own performances more positively. Recalled experiences explain a sizable fraction of crossinvestor variation in beliefs and dominate actual experiences in explanatory power. Recalled experiences also drive out the explanatory power of realized past returns for expected future returns, ruling in a memory-based foundation for return extrapolation behaviors.