Abstract

How does memory shape individuals' financial decisions? We find experimental evidence of a self-serving memory bias, which distorts beliefs and drives investment choices. Subjects who previously invested in a risky stock are more likely to remember positive investment outcomes and less likely to remember negative outcomes. In contrast, subjects who did not invest but merely observed the investment outcomes do not have this memory bias. Importantly, subjects do not adjust their behavior to account for the fallibility of their memory. After investing, they form overly optimistic beliefs and re-invest in the stock even when doing so reduces their expected return. The memory bias we document is relevant for understanding how people form expectations from experiences in financial markets and, more generally, for understanding household financial decision-making.
Original languageEnglish
PublisherSSRN
Number of pages40
DOIs
Publication statusPublished - 6 Nov 2019

JEL classifications

  • d01 - Microeconomic Behavior: Underlying Principles
  • d91 - "Intertemporal Consumer Choice; Life Cycle Models and Saving"
  • g11 - "Portfolio Choice; Investment Decisions"

Keywords

  • Memory
  • Selective Recall
  • Beliefs
  • Investor Behavior
  • Self-Image
  • Experimental Finance

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