Investor Memory and Biased Beliefs: Evidence from the Field

Zhengyang Jiang, Hongqi Liu, Cameron Peng and Hongjun Yan

No 33226, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We survey a large, representative sample of retail investors in China to elicit their memories of stock market investments and their return expectations. We merge this survey data with administrative transaction data to test a model in which investors selectively recall past experiences to form their beliefs. Our analysis uncovers new facts about investor memory and highlights similarity-based recall as a novel mechanism of belief formation in financial markets. A rising market prompts investors to recall their past experiences more positively, leading to more optimistic forecasts of future returns. Recalled experiences explain a sizable fraction of cross-investor variation in return expectations and dominate actual experiences in their explanatory power. In the transaction data, we confirm that recalled experiences affect investors' trading decisions through a belief channel.

JEL-codes: D14 D91 G41 (search for similar items in EconPapers)
Date: 2024-12
Note: AP
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