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

Ulrike M. Malmendier

No 16373, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Experience effects; beliefs; Recency; Domain specificity; Information; Stock-market participation; Trade dynamics; International capital flows (search for similar items in EconPapers)
JEL-codes: D14 D81 D83 D87 D91 F30 G11 G12 G41 G50 (search for similar items in EconPapers)
Date: 2021-07
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