DP16373 Experience Effects in Finance: Foundations, Applications, and Future Directions

Author(s): Ulrike M. Malmendier
Publication Date: July 2021
Keyword(s): beliefs, Domain Specificity, Experience effects, Information, International Capital Flows, Recency, Stock-market participation, Trade dynamics
JEL(s): D14, D81, D83, D87, D91, F30, G11, G12, G41, G50
Programme Areas: Financial Economics, International Trade and Regional Economics, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16373

This article establishes four key findings of the growing literature on experience effects in finance: (1) the long-lasting imprint of past experiences on beliefs and risk taking, (2) recency effects, (3) the domain-specificity of experience effects, and (4) imperviousness to information that is not experience-based. I first discuss the neuroscientific foundations of experience-based learning and sketch a simple model of its role in the stock market based on Malmendier et al. (2020a,b). I then distill the empirical findings on experience effects in stock-market investment, trade dynamics, and international capital flows, highlighting these four key features. Finally, I contrast models of belief formation that rely on "learned information" with models accounting for the neuroscience evidence on synaptic tagging and memory formation, and provide directions for future research.