Presenter: Cameron Peng, London School of Economics and Political Science     

Title: Investor Memory and Biased Beliefs: Evidence from the Field

Abstract: We survey a large representative sample of retail investors in China to elicit their memories of stock market investments and return expectations. We merge the 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 key mechanism of belief formation in financial markets. When the market is going up, it cues investors to recall their past experiences more positively, resulting in more optimistic forecasts of future returns. Recalled experiences explain a sizable fraction of cross-investor variation in beliefs and dominate actual experiences in explanatory power. In the transaction data, we also show that recalled experiences affect investors’ trading decisions through a belief channel.

Host: Anders Posselt