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NATIONAL BUREAU OF ECONOMIC RESEARCH
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The Effect of Prior Choices on Expectations and Subsequent Portfolio Decisions

Camelia M. Kuhnen, Sarah Rudorf, Bernd Weber

NBER Working Paper No. 23438
Issued in May 2017
NBER Program(s):The Asset Pricing Program

We document that prior portfolio choices influence investors' expectations about asset values, and their future choices. We find that people update more from information consistent with their prior choices, leading to sticky portfolios over time. These effects are related to how the brain's valuation centers encode new information about assets and about the trader's own success. These findings provide microfoundations for theoretical models where agents learn jointly about their skill and about asset values, leading to disagreement, and offer a common explanation for several puzzling investor behaviors, specifically, households' low stock market participation rate, and the disposition and repurchase effects.

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Document Object Identifier (DOI): 10.3386/w23438

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