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Reinforcement Learning in Repeated Portfolio Decisions

Author

Listed:
  • Linan Diao

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

  • Jörg Rieskamp

    () (University of Basel, Switzerland)

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.

Suggested Citation

  • Linan Diao & Jörg Rieskamp, 2011. "Reinforcement Learning in Repeated Portfolio Decisions," Jena Economic Research Papers 2011-009, Friedrich-Schiller-University Jena.
  • Handle: RePEc:jrp:jrpwrp:2011-009
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    File URL: http://pubdb.wiwi.uni-jena.de/pdf/wp_2011_009.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Peter Bossaerts & Charles Plott, 2004. "Basic Principles of Asset Pricing Theory: Evidence from Large-Scale Experimental Financial Markets," Review of Finance, European Finance Association, vol. 8(2), pages 135-169.
    3. 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.
    4. Ed Hopkins, 2002. "Two Competing Models of How People Learn in Games," Econometrica, Econometric Society, vol. 70(6), pages 2141-2166, November.
    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. Nick Feltovich, 2000. "Reinforcement-Based vs. Belief-Based Learning Models in Experimental Asymmetric-Information," Econometrica, Econometric Society, vol. 68(3), pages 605-642, May.
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    1. repec:wsi:qjfxxx:v:02:y:2012:i:01:n:s201013921250005x is not listed on IDEAS

    More about this item

    Keywords

    repeated portfolio decisions; reinforcement learning model; correlation;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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