DP13314 Learning from Noise: Evidence from India's IPO Lotteries

Author(s): Santosh Anagol, Vimal Balasubramaniam, Tarun Ramadorai
Publication Date: November 2018
Keyword(s): causal inference, experience, India, investment, learning, lotteries
JEL(s): C9, D83, G12, G14
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13314

We study a natural experiment in which 1.5 million investors participate in allocation lotteries for Indian IPO stocks. Randomized IPO gains cause winning investors to increase applications to future IPOs and substantially increase portfolio trading volume in non-IPO stocks relative to lottery losers; the effects are symmetrically negative for experienced losses. Investors who have received multiple past IPO allocations show smaller responses, suggesting learning/selection moderates responses to noise shocks. The evidence is most consistent with investors learning about their own ability from experienced noise, drawing inferences about their skill from luck.