Experience Effects in Finance: Foundations, Applications, and Future Directions*
X-capm: an extrapolative capital asset pricing model
Ulrike Malmendier
Review of Finance, 2021, vol. 25, issue 5, 1339-1363
Abstract:
This article establishes four key findings of the growing literature on experience effects in finance: (i) the long-lasting imprint of past experiences on beliefs and risk taking; (ii) recency effects; (iii) the domain-specificity of experience effects; and (iv) 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
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Citations: View citations in EconPapers (19)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:revfin:v:25:y:2021:i:5:p:1339-1363.
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