Free DP Download 29 October 2021 - Experience Effects in Finance: Foundations, Applications, and Future Directions

Friday, October 29, 2021

Ulrike M. Malmendier | CEPR Discussion Paper No. 16373 | July 2021


This paper 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.

You can also listen to a podcast where Ulrike Malmendier discusses the paper's findings with CEPR's Tim Phillips