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Learning (Not) to Trade: Lindy's Law in Retail Traders

Author

Listed:
  • Teodor Godina

    (Swissquote Bank)

  • Serge Kassibrakis

    (Swissquote Bank)

  • Semyon Malamud

    (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute)

  • Alberto Teguia

    (The University of British Columbia)

  • Jiahua Xu

    (Ecole Polytechnique Fédérale de Lausanne)

Abstract

We develop a rational model of trading behavior in which the agents gradually learn about their ability to trade, and exit after poor trading performance. We demonstrate that it is optimal for experienced traders to "procrastinate" and postpone exit even after bad results. We embed this "optimal procrastination" in a model of population dynamics with entry and endogenous exit, and generate predictions about the dynamics of various cross-sectional characteristics. We test these population-level predictions using a large client data set of a major Swiss retail broker. Consistent with the model, we find that endogenous exit decisions produce non-trivial and non-monotonic population-wide linkages between performance, exits, and trading experience.

Suggested Citation

  • Teodor Godina & Serge Kassibrakis & Semyon Malamud & Alberto Teguia & Jiahua Xu, 2020. "Learning (Not) to Trade: Lindy's Law in Retail Traders," Swiss Finance Institute Research Paper Series 20-100, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp20100
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    More about this item

    Keywords

    Trading; Investor behavior; Learning; Rationality;
    All these keywords.

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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