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

Ulrike Malmendier

No 29074, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: D03 D8 D83 D87 D9 E17 E52 E7 G02 G4 (search for similar items in EconPapers)
Date: 2021-07
New Economics Papers: this item is included in nep-cfn, nep-cwa, nep-isf, nep-mac and nep-ore
Note: AP EFG ME
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Citations: View citations in EconPapers (19)

Published as Ulrike Malmendier, 2021. "Experience Effects in Finance: Foundations, Applications, and Future Directions," Review of Finance, vol 25(5), pages 1339-1363.

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