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Do individual investors learn from their trading experience?

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Author Info

  • Nicolosi, Gina
  • Peng, Liang
  • Zhu, Ning

Abstract

After analyzing retail investors' stock trades for potential learning behavior, we present evidence that individual investors learn from their trading experience. Initially, we question whether investors' previous forecasting ability (inferred from prior purchases' subsequent risk-adjusted performance) affects their future trade profitability and activity. Indeed, as an investor's inferred ability increases, so does her ensuing trade profitability and intensity. Further, because additional investment experience allows more accurate ability inference, we posit that trading experience should help investors obtain better investment performance. Consistent with this hypothesis, not only do excess portfolio returns improve with account tenure, but we also find that trade quality (i.e., average raw and excess buy-minus-sell returns) significantly increases with experience (i.e., calendar time and account tenure). In sum, individual stock investors do learn, and they consequently adjust their behavior and thus effectively improve their investment performance.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Markets.

Volume (Year): 12 (2009)
Issue (Month): 2 (May)
Pages: 317-336

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Handle: RePEc:eee:finmar:v:12:y:2009:i:2:p:317-336

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Web page: http://www.elsevier.com/locate/finmar

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Keywords: Learning Individual investors Rationality Trading;

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Citations

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Cited by:
  1. Glaser, Markus & Weber, Martin, 2005. "Which Past Returns Affect Trading Volume?," SIFR Research Report Series 35, Institute for Financial Research.
  2. Guiso, Luigi & Sodini, Paolo, 2012. "Household Finance: An Emerging Field," CEPR Discussion Papers 8934, C.E.P.R. Discussion Papers.
  3. Ruey-Dang Chang & Jo-Ting Wei, 2011. "Effects of governance on investment decisions and perceptions of reporting credibility: Investment experience of Taiwanese individual investors," Asia Pacific Journal of Management, Springer, vol. 28(1), pages 139-155, March.
  4. Margarida Abreu & Victor Mendes, 2011. "Information, Overconfidence and Trading: Do the Sources of Information Matter?," Working Papers 2011/25, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon..
  5. Glaser, Markus & Weber, Martin, 2009. "Which past returns affect trading volume?," Journal of Financial Markets, Elsevier, vol. 12(1), pages 1-31, February.
  6. Glaser, Markus & Weber, Martin, 2007. "Why inexperienced investors do not learn: They do not know their past portfolio performance," Finance Research Letters, Elsevier, vol. 4(4), pages 203-216, December.
  7. Camille Magron, 2012. "Performance of individual investors and personal investment objectives," Working Papers of LaRGE Research Center 2012-07, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg (France).
  8. Jie Lu & Bruce Mizrach, 2007. "Is Talk Cheap Online: Strategic Interaction in A Stock Trading Chat Room," Departmental Working Papers 200701, Rutgers University, Department of Economics.
  9. Camille Magron & Maxime Merli, 2012. "Stocks repurchase and sophistication of individual investors," Working Papers of LaRGE Research Center 2012-02, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg (France).
  10. Pütz, Alexander & Ruenzi, Stefan, 2010. "Overconfidence among professional investors: Evidence from mutual fund managers," CFR Working Papers 08-08 [rev.], University of Cologne, Centre for Financial Research (CFR).
  11. Bruce Mizrach & Susan Weerts, 2004. "Experts Online: An Analysis of Trading Activity in a Public Internet Chat Room," Departmental Working Papers 200412, Rutgers University, Department of Economics.
  12. Margarida Abreu & Victor Mendes & João A. Santos, 2010. "Home Country Bias: Does Domestic Experience Help Investors Enter Foreign Markets?," Working Papers 2010/02, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon..
  13. Niessen, Alexandra & Ruenzi, Stefan, 2007. "Sex matters: Gender differences in a professional setting," CFR Working Papers 06-01, University of Cologne, Centre for Financial Research (CFR).
  14. Chiang, Yao-Min & Hirshleifer, David & Qian, Yiming & Sherman, Ann, 2009. "Learning to Fail? Evidence from Frequent IPO Investors," MPRA Paper 16854, University Library of Munich, Germany, revised Aug 2009.

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