expectations in macro-finance, especially monetary economics, for example, Malmendier and Shen (2018); Malmendier and Nagel (2016); Malmendier, Nagel, and Yan (2021) (for an overview cf. Malmendier (2021)). However, we still have little

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Figure 4.Open in new tabDownload slide

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“living through a depression”

“knowledge of the constraints governing the physical world.”

“remembering an item involves a jump-back-in-time to the state of mind that obtained when the item was previously experienced,”

(Rabin, 1998).

Tversky and Kahneman, 1974

Weber et al. (1993); Weber, Blais, and Betz (2002), t

The neuroscientific evidence mirrors this insight, too. The strength and shape of synapse formation depends on how and how often we make an experience

we can go either way

“available” to them

it is worth elaborating on the notion “domain” and “domain-specific.”

Modern neuroscience suggests exactly that.

In practice, it is of course often hard to perfectly control for all direct and indirect implications of economic shocks that might have changed the economic reality of those who have experienced it.

I first discuss the neuroscientific foundations of experience-based learning and sketch a simple model of its role in the stock market based on Malmendier et al. (2020a, b). I then distill the empirical findings on experience effects in stock-market investment, trade dynamics, and international capital flows, highlighting these four key features. Finally, I contrast models of belief formation that rely on “learned information” with models accounting for the neuroscience evidence on synaptic tagging and memory formation, and provide directions for future research.

cohort consumes everything

The type of neuroscientific evidence presented in here describes processes on a very disaggregate

the formation of synapses provides a foundation for our four key features

let me preview here four “key features” that have emerged from the growing empirical literature and which, as I will argue,

likely

likely

sometimes

Abstract 1. Introduction 2. Neuroscience Foundation 3. Theoretical Model 4. Empirical Evidence from Capital Markets 5. Related Approaches 6. Implications for Future Research Footnotes References

Beliefs versus  Preferences

Introduction

This article establishes four key findings of the growing literature on experience effects in finance: (i) the long-lasting imprint of past experiences on beliefs and risk taking; (ii) recency effects; (iii) the domain-specificity of experience effects; and (iv) imperviousness to information that is not experience-based. I first discuss the neuroscientific foundations of experience-based learning and sketch a simple model of its role in the stock market based on Malmendier et al. (2020a, b). I then distill the empirical findings on experience effects in stock-market investment, trade dynamics, and international capital flows, highlighting these four key features. Finally, I contrast models of belief formation that rely on “learned information” with models accounting for the neuroscience evidence on synaptic tagging and memory formation, and provide directions for future research.

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Ulrike Malmendier

Review of Finance

Published: 17 September 2021

Experience Effects in Finance: Foundations, Applications, and Future Directions