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Do Investors Overweight Personal Experience? Evidence from IPO Subscriptions

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  • MARKKU KAUSTIA
  • SAMULI KNÜPFER

Abstract

We find a strong positive link between past IPO returns and future subscriptions at the investor level in Finland. Our setting allows us to trace this effect to the returns personally experienced by investors; the effect is not explained by patterns related to the IPO cycle, or wealth effects. This behavior is consistent with reinforcement learning, where personally experienced outcomes are overweighted compared to rational Bayesian learning. The results provide a microfoundation for the argument that investor sentiment drives IPO demand. The paper also contributes to understanding how popular investment styles develop, and has implications for the marketing of financial products.

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  • 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.
    • Handle: RePEc:bla:jfinan:v:63:y:2008:i:6:p:2679-2702
    DOI: 10.1111/j.1540-6261.2008.01411.x
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