But the study also found that institutional investors do not have such a steep learning curve, said researcher Yiming Qian, an associate professor of finance in the Tippie College of Business. In fact, she said institutional investors seem to have no learning curve at all.
“Individual investors who happen to gain a good return on their first purchase are more aggressive in subsequent purchases and their earnings decrease with each purchase,” she said. “But with institutional investors, their earnings do not decrease or increase with subsequent purchases.”
She said the trend with individuals is a result of what is called naïve reinforcement learning, where people who make money on their first trade believe their success was due to their own investment skill and not to outside forces. Confusing luck with ability and armed with a false sense of confidence, they continue buying stocks, only to see their returns dwindle with each purchase.
Qian and her co-researchers analyzed the purchases of more than 31,000 individual investors and more than 1,200 institutional investors who participated in IPO auctions on the Taiwan Stock Exchange between 1995 and 2000. Using trader ID numbers, they were able to track each traders’ purchases in the 84 auctions held during that time, and recorded the earnings for each investor on each transaction.
Overwhelmingly, she said, beginning traders performed worse with experience, earning lower profits or even showing losses with every trade. The study found that from the first IPO auction to the second IPO auction, the average percentage return decreased by 2.9 percent and the average dollar profits decreased by $6,480.
“Individuals became unduly optimistic after receiving good returns in early trading, mistakenly attributing it to their skill instead of to luck or some other part of the external environment,” said Qian. Finally, after 24 auctions, their earnings per trade stopped decreasing, and eventually started going back up again, suggesting they had finally caught on.
Of course, this is completely counter-intuitive to the belief that we get better at something with experience. But Qian said that because of naïve reinforcement learning, we often learn to fail (which also happens to be the title of her paper, “Learning to Fail”). The concept was established by psychology researchers and shows people often fail at something because they learned the wrong lessons from an earlier success. The study from Qian and her co-researchers is one of the first to apply the concept to investing.
In the Taiwan IPO auctions, Qian said learning the wrong lessons led to individual traders becoming more aggressive with each auction, bidding higher prices, and being less selective about the auctions in which they participated.
But she said the data showed the naïve learning effect does not seem to apply to institutional investors.
“Institutional investors do not exhibit any of the patterns for retail investors,” she said. “There’s no return deterioration and no decreased auction selection ability, nor do they bid more aggressively. However, they do not seem to improve either.”
Qian said her research team didn’t examine possible causes for this, but she speculates it might be because institutional traders have more financial and talent resources available for research.
Qian’s paper, “Learning to Fail? Evidence from Frequent IPO Investors,” will be published in a forthcoming issue of the journal Review of Financial Studies. Her co-authors are Yao-Min Chiang of the National Chengchi University in Taiwan; David Hershleifer of the University of California, Irvine; and Ann E. Sherman of DePaul University.
Yiming Qian, 319-335-0934, email@example.com; Tom Snee, 319-384-0010 (office), 319-541-8434 (cell), firstname.lastname@example.org
Yiming Qian | Newswise Science News
A sudden drop in outdoor temperature increases the risk of respiratory infections
11.01.2017 | University of Gothenburg
Urbanization to convert 300,000 km2 of prime croplands
27.12.2016 | Mercator Research Institute on Global Commons and Climate Change (MCC) gGmbH
Yersiniae cause severe intestinal infections. Studies using Yersinia pseudotuberculosis as a model organism aim to elucidate the infection mechanisms of these...
Researchers from the University of Hamburg in Germany, in collaboration with colleagues from the University of Aarhus in Denmark, have synthesized a new superconducting material by growing a few layers of an antiferromagnetic transition-metal chalcogenide on a bismuth-based topological insulator, both being non-superconducting materials.
While superconductivity and magnetism are generally believed to be mutually exclusive, surprisingly, in this new material, superconducting correlations...
Laser-driving of semimetals allows creating novel quasiparticle states within condensed matter systems and switching between different states on ultrafast time scales
Studying properties of fundamental particles in condensed matter systems is a promising approach to quantum field theory. Quasiparticles offer the opportunity...
Among the general public, solar thermal energy is currently associated with dark blue, rectangular collectors on building roofs. Technologies are needed for aesthetically high quality architecture which offer the architect more room for manoeuvre when it comes to low- and plus-energy buildings. With the “ArKol” project, researchers at Fraunhofer ISE together with partners are currently developing two façade collectors for solar thermal energy generation, which permit a high degree of design flexibility: a strip collector for opaque façade sections and a solar thermal blind for transparent sections. The current state of the two developments will be presented at the BAU 2017 trade fair.
As part of the “ArKol – development of architecturally highly integrated façade collectors with heat pipes” project, Fraunhofer ISE together with its partners...
At TU Wien, an alternative for resource intensive formwork for the construction of concrete domes was developed. It is now used in a test dome for the Austrian Federal Railways Infrastructure (ÖBB Infrastruktur).
Concrete shells are efficient structures, but not very resource efficient. The formwork for the construction of concrete domes alone requires a high amount of...
10.01.2017 | Event News
09.01.2017 | Event News
05.01.2017 | Event News
18.01.2017 | Materials Sciences
18.01.2017 | Information Technology
18.01.2017 | Ecology, The Environment and Conservation