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Why inexperienced investors do not learn: They do not know their past portfolio performance

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  • Glaser, Markus
  • Weber, Martin

Abstract

Recently, researchers have gone a step further from just documenting biases of individual investors. More and more studies analyze how experience affects decisions and whether biases are eliminated by trading experience and learning. A necessary condition to learn is that investors actually know what happened in the past and that the views of the past are not biased. We contribute to the above mentioned literature by showing why learning and experience go hand in hand. Inexperienced investors are not able to give a reasonable self-assessment of their own past realized stock portfolio performance which impedes investors' learning ability. Based on the answers of 215 online broker investors to an Internet questionnaire, we analyze whether investors are able to correctly estimate their own realized stock portfolio performance. We show that investors are hardly able to give a correct estimate of their own past realized stock portfolio performance and that experienced investors are better able to do so. In general, we can conclude that we find evidence that investor experience lessens the simple mathematical error of estimating portfolio returns, but seems not to influence their “behavioral” mistakes pertaining to how good (in absolute sense or relative to other investors) they are.
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  • 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.
  • Handle: RePEc:eee:finlet:v:4:y:2007:i:4:p:203-216
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    Cited by:

    1. Oliver Gloede & Lukas Menkhoff, 2014. "Financial Professionals' Overconfidence: Is It Experience, Function, or Attitude?," European Financial Management, European Financial Management Association, vol. 20(2), pages 236-269, March.
    2. E. M. Cervellati & P. Pattitoni & M. Savioli, 2016. "Cognitive Biases and Entrepreneurial Under-Diversification," Working Papers wp1076, Dipartimento Scienze Economiche, Universita' di Bologna.
    3. Nofsinger, John R., 2012. "Household behavior and boom/bust cycles," Journal of Financial Stability, Elsevier, vol. 8(3), pages 161-173.
    4. Meyer, Steffen & Urban, Linda & Ahlswede, Sophie, 2016. "Does feedback on personal investment success help?," SAFE Working Paper Series 157, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    5. Hoffmann, Arvid O.I. & Post, Thomas & Pennings, Joost M.E., 2013. "Individual investor perceptions and behavior during the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 60-74.
    6. Eichfelder, Sebastian & Schorn, Michael, 2009. "Tax compliance costs: a business administration perspective," Discussion Papers 2009/3, Free University Berlin, School of Business & Economics.
    7. Xu, Feng & Wan, Difang, 2015. "The impacts of institutional and individual investors on the price discovery in stock index futures market: Evidence from China," Finance Research Letters, Elsevier, vol. 15(C), pages 221-231.
    8. Meyer, Steffen & Urban, Linda & Ahlswede, Sophie, 2015. "Does a personalized feedback on investment success mitigate investment mistakes of private investors? Answers from large natural field experiment," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112988, Verein für Socialpolitik / German Economic Association.

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