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Reinforcement Learning in Repeated Portfolio Decisions

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  • Linan Diao

    ()
    (Max Planck Institute of Economics, Jena, Germany)

  • Jörg Rieskamp

    ()
    (University of Basel, Switzerland)

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    Abstract

    How do people make investment decisions when they receive outcome feedback? We examined how well the standard mean-variance model and two reinforcement models predict people's portfolio decisions. The basic reinforcement model predicts a learning process that relies solely on the portfolio's overall return, whereas the proposed extended reinforcement model also takes the risk and covariance of the investments into account. The experimental results illustrate that people reacted sensitively to different correlation structures of the investment alternatives, which was best predicted by the extended reinforcement model. The results illustrate that simple reinforcement learning is sufficient to detect correlation between investments.

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    File URL: http://pubdb.wiwi.uni-jena.de/pdf/wp_2011_009.pdf
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    Bibliographic Info

    Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2011-009.

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    Date of creation: 16 Feb 2011
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    Handle: RePEc:jrp:jrpwrp:2011-009

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    Keywords: repeated portfolio decisions; reinforcement learning model; correlation;

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    1. Bossaerts, Peter & Plott, Charles, 2000. "Basic Principles Of Asset Pricing Theory: Evidence From Large-Scale Experimental Financial Markets," CEPR Discussion Papers 2578, C.E.P.R. Discussion Papers.
    2. Ed Hopkins, 2001. "Two Competing Models of How People Learn in Games," Levine's Working Paper Archive 625018000000000226, David K. Levine.
    3. Nick Feltovich, 2000. "Reinforcement-Based vs. Belief-Based Learning Models in Experimental Asymmetric-Information," Econometrica, Econometric Society, vol. 68(3), pages 605-642, May.
    4. Bossaerts, Peter & Plott, Charles, 2002. "The CAPM in thin experimental financial markets," Journal of Economic Dynamics and Control, Elsevier, vol. 26(7-8), pages 1093-1112, July.
    5. Colin Camerer & Teck-Hua Ho, 1999. "Experience-weighted Attraction Learning in Normal Form Games," Econometrica, Econometric Society, vol. 67(4), pages 827-874, July.
    6. Markku Kaustia & Samuli Knüpfer, 2008. "Do Investors Overweight Personal Experience? Evidence from IPO Subscriptions," Journal of Finance, American Finance Association, vol. 63(6), pages 2679-2702, December.
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