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How Investment Performance Affects the Formation and Use of Beliefs


Grosshans, Daniel; Zeisberger, Stefan; Langnickel, Ferdinand (2017). How Investment Performance Affects the Formation and Use of Beliefs. SSRN 2972112, University of Zurich.

Abstract

This study provides new insights on how investors form beliefs about future asset prices and how they use these beliefs for their trading decisions. Compared to the objective Bayesian benchmark, investors become overly optimistic when they face a paper loss. In addition, selling decisions are less sensitive to beliefs than purchase decisions. This difference is driven by selling behavior in the presence of paper losses. Our insights stem from a laboratory experiment in which participants are price-takers and trade a stock governed by a persistent two-state Markov chain. At each point in time, we elicit incentivized beliefs about the probability that the stock price will increase in the next period.

Abstract

This study provides new insights on how investors form beliefs about future asset prices and how they use these beliefs for their trading decisions. Compared to the objective Bayesian benchmark, investors become overly optimistic when they face a paper loss. In addition, selling decisions are less sensitive to beliefs than purchase decisions. This difference is driven by selling behavior in the presence of paper losses. Our insights stem from a laboratory experiment in which participants are price-takers and trade a stock governed by a persistent two-state Markov chain. At each point in time, we elicit incentivized beliefs about the probability that the stock price will increase in the next period.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:22 May 2017
Deposited On:23 May 2017 13:00
Last Modified:30 Aug 2017 01:55
Series Name:SSRN
Number of Pages:22
Free access at:Official URL. An embargo period may apply.
Official URL:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2972112
Other Identification Number:merlin-id:14839

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