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Persistence of Beliefs in an Investment Experiment

Author

Listed:
  • K. Jeremy Ko

    (Department of Risk, Strategy, and Financial Innovation, Securities and Exchange Commission, USA)

  • Zhijian (James) Huang

    (Lubar School of Business, University of Wisconsin-Milwaukee, S430E Lubar Hall, P. O. Box 742, Milwaukee, WI 53201, USA)

Abstract

A number of behavioral finance theories posit that investors adhere to prior beliefs in spite of new information. This paper reports the results of an investment experiment which shows that subjects' inferences are biased by their prior beliefs in a manner that depends on investment outcomes. Specifically, survey responses and investment behavior indicate that subjects' perception of new information was more positively biased for their previously favored assets when incurring losses than gains. This asymmetric bias may help explain empirical patterns such as loser momentum and suggests modifications to models of belief persistence in markets.

Suggested Citation

  • K. Jeremy Ko & Zhijian (James) Huang, 2012. "Persistence of Beliefs in an Investment Experiment," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 2(01), pages 1-34.
    • Handle: RePEc:wsi:qjfxxx:v:02:y:2012:i:01:n:s201013921250005x
    DOI: 10.1142/S201013921250005X
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    References listed on IDEAS

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    1. Zuchel, Heiko, 2001. "What Drives the Disposition Effect?," Sonderforschungsbereich 504 Publications 01-39, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    2. Dimitri Vayanos & Paul Woolley, 2013. "An Institutional Theory of Momentum and Reversal," The Review of Financial Studies, Society for Financial Studies, vol. 26(5), pages 1087-1145.
    3. Linan Diao & Jörg Rieskamp, 2011. "Reinforcement Learning in Repeated Portfolio Decisions," Jena Economics Research Papers 2011-009, Friedrich-Schiller-University Jena.
    4. Merkle, Christoph & Weber, Martin, 2014. "Do investors put their money where their mouth is? Stock market expectations and investing behavior," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 372-386.
    5. Zuchel, Heiko, 2001. "What drives the disposition effect?," Papers 01-39, Sonderforschungsbreich 504.
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    Cited by:

    1. Wang, Weijia, 2019. "A Pareto Criterion on Systemic Risk," MPRA Paper 93699, University Library of Munich, Germany.
    2. Weijia Wang & Shaoan Huang, 2021. "Risk sharing and financial stability: a welfare analysis," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 16(1), pages 211-228, January.
    3. Changtai Li & Weihong Huang & Wei-Siang Wang & Wai-Mun Chia, 2023. "Price Change and Trading Volume: Behavioral Heterogeneity in Stock Market," Computational Economics, Springer;Society for Computational Economics, vol. 61(2), pages 677-713, February.

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