The Effect of Prior Choices on Expectations and Subsequent Portfolio Decisions
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.
Funding for this work was provided by the German Research Council (DFG; We 4427/3-2), the Frankfurt Institute of Risk Management and Regulation, and the Wells Fargo Center for Corporate Finance at the University of North Carolina at Chapel Hill. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.