Accounting & Finance Research Community Seminar

Title: Investor Memory and Biased Beliefs: Evidence from the Field
Date: 12 October 2022
Time: 14:00-15:00
Location: NUBS 2.13

Guest Speaker: Dr Cameron Peng, London School of Economics

If you would like to attend, please register using the following link: https://forms.office.com/r/JfgNB9hwsd.

Abstract
We survey a large, representative sample of retail investors to elicit their memories of stock market investment and their return expectations. By merging the survey data with administrative data of transactions, we confirm the validity of elicited memories, examine their properties, and establish new facts that shed light on the relationship between investor memory and belief formation. First, when recalling past market movements, investors tend to think of both recent episodes and dramatic episodes such as bubbles and crashes. Old and more experienced investors, in particular, tend to recall distant episodes featuring rising markets. Second, market conditions significantly affect recall: when returns are high, investors are more likely to retrieve past memories of rising markets and recall past performances with a positive bias. Third, memory has large explanatory power for cross-investor variation in beliefs. A single variable based on recalled performance has similar explanatory power for return expectations to that of a dozen individual characteristics combined. Fourth, recall biases are correlated with overconfidence and extrapolation, providing evidence of memory-based microfoundations for the latter. These facts establish the relevance of key memory mechanisms in financial markets and provide guidance for memory-based theories of belief-formation.