Learning (Not) to Trade: Lindy's Law in Retail Traders

Teodor Godina, Serge Kassibrakis, Semyon Malamud, Alberto Teguia and Jiahua Xu
Additional contact information
Teodor Godina: Swissquote Bank
Serge Kassibrakis: Swissquote Bank
Semyon Malamud: Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute
Alberto Teguia: The University of British Columbia

No 20-100, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We develop a rational model of trading behavior in which the agents gradually learn about their ability to trade, and exit after poor trading performance. We demonstrate that it is optimal for experienced traders to "procrastinate" and postpone exit even after bad results. We embed this "optimal procrastination" in a model of population dynamics with entry and endogenous exit, and generate predictions about the dynamics of various cross-sectional characteristics. We test these population-level predictions using a large client data set of a major Swiss retail broker. Consistent with the model, we find that endogenous exit decisions produce non-trivial and non-monotonic population-wide linkages between performance, exits, and trading experience.

Keywords: Trading; Investor behavior; Learning; Rationality (search for similar items in EconPapers)
JEL-codes: D10 G10 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2020-12
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp20100

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