Kuhnen, Camelia M. (2012): Asymmetric learning from financial information.
Download (372kB) | Preview
The goal of this study is to ask whether investors learn differently from gains (positive news) versus losses (negative news), whether learning performance is better or worse when people are actively investing in a security or passively observing the security’s payoffs, and whether there are personal characteristics that correlate with learning performance. The experimental evidence documented here indicates that the ability to learn from financial information is on average worse in the loss domain, in particular if the investor has personally experienced the prior outcomes of the financial asset considered. Within individual, learning from gains versus losses, or during active versus passive involvement, are not perfectly correlated, indicating that there exists heterogeneity across people with respect to the type of financial information or context to which they are the most sensitive. Learning performance is determined by acquired financial expertise as well as by genetic factors related to memory and cognitive control.
|Item Type:||MPRA Paper|
|Original Title:||Asymmetric learning from financial information|
|Keywords:||financial decision making, learning, gains, losses, genes, COMT, neuroeconomics|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness
C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior
|Depositing User:||Camelia Kuhnen|
|Date Deposited:||12. Jun 2012 17:19|
|Last Modified:||12. Feb 2013 22:23|
Ashby, F. G., Valentin, V. V. and Turken, A. U.: 2002, Emotional cognition: From brain to behaviour, John Benjamins Publishing Company, Amsterdam, chapter The effects of positive affect and arousal on working memory and executive attention: Neurobiology and computational models, pp. 245–287.
Asparouhova, E., Bossaerts, P., Eguia, J. and Zame, W.: 2010, Cognitive biases, ambiguity aversion and asset pricing in financial markets, Working paper .
Barberis, N. and Huang, M.: 2001, Mental accounting, loss aversion and individual stock returns, Journal of Finance 56(4).
Barberis, N., Huang, M. and Santos, T.: 2001, Prospect theory and asset prices, The Quarterly Journal of Economics .
Barberis, N., Shleifer, A. and Vishny, R.: 1998, A model of investor sentiment, Journal of Financial Economics 49, 307–343.
Barinov, A.: 2009, Analyst disagreement and aggregate volatility risk, Working paper .
Bollerslev, T. and Todorov, V.: 2011, Tails, fears and risk premia, Journal of Finance 66, 2165–2211.
Bossaerts, P.: 2009, What decision neuroscience teaches us about financial decision making, Annual Review of Financial Economics 1, 383–404.
Bruguier, A. J., Quartz, S. R. and Bossaerts, P.: 2010, Exploring the nature of ”trader intuition”, Journal of Finance 65(5), 1703-1723.
Brunnermeier, M. K., Christian, G. and Parker, J. A.: 2007, Optimal beliefs, asset prices, and the preference for skewed returns, American Economic Review 97(2), 159–165.
Brunnermeier, M. K. and Parker, J. A.: 2005, Optimal expectations, American Economic Review 95(4), 1092–1118.
Campbell, J. Y., Lettau, M., Malkiel, B. G. and Xu, Y.: 2001, Have individual stocks become more volatile? An empirical exploration of idiosyncratic risk, Journal of Finance 56(1), 1–43.
Carlin, B., Kogan, S. and Lowery, R.: forthcoming, Trading complex assets, Journal of Finance .
Charness, G. and Levin, D.: 2005, When optimal choices feel wrong: A laboratory study of Bayesian updating, complexity, and affect, American Economic Review 95(4), 1300–1309.
Cronqvist, H. and Siegel, S.: 2012, Why do individuals exhibit investment biases?, Working paper .
Dickinson, D. and Elvevg, B.: 2009, Genes, cognition and brain through a COMT lens, Neuroscience 164(1), 72–87.
Doll, B. B., Hutchison, K. E. and Frank, M. J.: 2011, Dopaminergic genes predict individual differences in susceptibility to confirmation bias, Journal of Neuroscience 31(16), 6188-6198.
Elmerick, S. A., P, M. C. and Fox, J. J.: 2002, Use of financial planners by U.S. households, Financial Services Review 11, 217–231.
Eppinger, B., Herbert, M. and Kray, J.: 2010,We remember the good things: Age differences in learning and memory, Neurobiology of Learning and Memory 93, 515–521.
Frank, M. J., Moustafa, A. A., Haughey, H. M., Curran, T. and Hutchison, K. E.: 2007, Genetic triple dissociation reveals multiple roles for dopamine in reinforcement learning, Proceeding of the National Academy of Sciences 104(41), 16311–16316.
Froot, K. A.: 2001, The market for catastrophe risk: a clinical examination, Journal of Financial Economics 60, 529–571.
Gabaix, X.: 2011, A sparsity-based model of bounded rationality, Working paper .
Gabaix, X., Laibson, D., Moloche, G. and Weinberg, S.: 2006, Costly information acquisition: Experimental analysis of a boundedly rational model, American Economic Review 96(4), 1043–1068.
Gennaioli, N. and Shleifer, A.: 2010, What comes to mind, Quarterly Journal of Economics 125(4), 1399–1433.
Guiso, L., Sapienza, P. and Zingales, L.: 2011, Time varying risk aversion, Working paper .
Kacperczyk, M., Van Nieuwerburgh, S. and Veldkamp, L.: 2011, Rational attention allocation over the business cycle.
Kahneman, D. and Tversky, A.: 1979, Prospect theory: An analysis of decision under risk, Econometrica 47, 263–291. Kluger, B. D. and Wyatt, S. B.: 2004, Are judgment errors reflected in market prices and allocations? Experimental evidence based on the Monty Hall problem, Journal of Finance 59, 969–997.
Knutson, B. and Bossaerts, P.: 2007, Neural antecedents of financial decisions, Journal of Neuroscience 27(31), 8174–8177.
Kogan, S.: 2009, Distinguishing the effect of overconfidence from rational best-response on information aggregation, Review of Financial Studies 22(5), 1889–1914.
Kuhnen, C. M. and Knutson, B.: 2005, The neural basis of financial risk taking, Neuron 47, 763–770.
Kuhnen, C. M. and Knutson, B.: 2011, The influence of affect on beliefs, preferences, and financial decisions, Journal of Financial and Quantitative Analysis 46(3), 605–626.
Kunreuther, H., Ginsberg, R., Miller, L., Sagi, P., Slovic, P., Borkan, B. and Katz, N.: 1978, Disaster Insurance Protection: Public Policy Lessons, Wiley Interscience.
Lo, A. W.: 2011, Handbook on Systemic Risk, Cambridge University Press, chapter Fear, Greed, and Financial Crises: A Cognitive Neurosciences Perspective.
Lo, A. W., Repin, D. V. and Steenbarger, B. N.: 2005, Fear and greed in financial markets: A clinical study of day-traders, American Economic Review 95(2), 352-359.
Lusardi, A. and Mitchell, O. S.: 2007, Baby boomer retirement security: The roles of planning, financial literacy, and housing wealth, Journal of Monetary Economics 54(205-224).
Malmendier, U. and Nagel, S.: 2011, Depression babies: Do macroeconomic experiences affect risk-taking?, Quarterly Journal of Economics 126(1), 373–416.
Mather, M., Mitchell, K. J., Raye, C. L., Novak, D. L., Greene, E. J. and Johnson, M. K.: 2006, Emotional arousal can impair feature binding in working memory, Journal of Cognitive Neuroscience 18(4), 614–625.
Mather, M. and Schoeke, A.: 2011, Positive outcomes enhance incidental learning for both younger and older adults, Frontiers in Neuroscience 5(129), 1–10.
Odean, T.: 1998, Are investors reluctant to realize their losses?, The Journal of Finance 53(5).
Palm, R.: 1995, Earthquake Insurance: A Longitudinal Studies of California Homeowners, Boulder: Westview Press.
Payzan-LeNestour, E.: 2010, Bayesian learning in unstable settings: Experimental evidence based on the bandit problem, Working paper .
Prelec, D.: 1998, The probability weighting function, Econometrica 66(3), 497–527.
Samanez-Larkin, G., Kuhnen, C. M. and Knutson, B.: 2011, Gain and loss learning differentially contribute to life financial outcomes, PLoS ONE 6(9).
Schwert, G. W.: 1989, Why does stock market volatility change over time?, Journal of Finance 44(5), 1115–1153.
Sokol-Hessner, P., Camerer, C. F. and Phelps, E. A.: 2012, Emotion regulation reduces loss aversion and decreases amygdala responses to losses, Social Cognitive and Affective Neuroscience forthcoming.
Sokol-Hessner, P., Hsu, M., Curley, N. G., Delgado, M. R., Camerer, C. F. and Phelps, E. A.: 2009, Thinking like a trader selectively reduces individuals loss aversion, Proceedings of the National Academy of Sciences 106(13), 5035–5040.
Todorov, V.: 2010, Variance risk premium dynamics: The role of jumps, Review of Financial Studies 23, 345–383.
Van Nieuwerburgh, S. and Veldkamp, L.: 2010, Information acquisition and under-diversification, Review of Economic Studies 77(2), 779–805.