Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Study Suggests Experience Does Not Help Novice Investors

04.11.2010
Intuition tells us that the more often we do something, the better we get. But a new study from the University of Iowa shows that beginning investors actually earn poorer returns from their investments as they get more experience, and that it takes 24 trades before they’ve learned the ropes.

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, yiming-qian@uiowa.edu; Tom Snee, 319-384-0010 (office), 319-541-8434 (cell), tom-snee@uiowa.edu

Yiming Qian | Newswise Science News
Further information:
http://www.uiowa.edu

More articles from Studies and Analyses:

nachricht New study: How does Europe become a leading player for software and IT services?
03.04.2017 | Fraunhofer-Institut für System- und Innovationsforschung (ISI)

nachricht Reusable carbon nanotubes could be the water filter of the future, says RIT study
30.03.2017 | Rochester Institute of Technology

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Can the immune system be boosted against Staphylococcus aureus by delivery of messenger RNA?

Staphylococcus aureus is a feared pathogen (MRSA, multi-resistant S. aureus) due to frequent resistances against many antibiotics, especially in hospital infections. Researchers at the Paul-Ehrlich-Institut have identified immunological processes that prevent a successful immune response directed against the pathogenic agent. The delivery of bacterial proteins with RNA adjuvant or messenger RNA (mRNA) into immune cells allows the re-direction of the immune response towards an active defense against S. aureus. This could be of significant importance for the development of an effective vaccine. PLOS Pathogens has published these research results online on 25 May 2017.

Staphylococcus aureus (S. aureus) is a bacterium that colonizes by far more than half of the skin and the mucosa of adults, usually without causing infections....

Im Focus: A quantum walk of photons

Physicists from the University of Würzburg are capable of generating identical looking single light particles at the push of a button. Two new studies now demonstrate the potential this method holds.

The quantum computer has fuelled the imagination of scientists for decades: It is based on fundamentally different phenomena than a conventional computer....

Im Focus: Turmoil in sluggish electrons’ existence

An international team of physicists has monitored the scattering behaviour of electrons in a non-conducting material in real-time. Their insights could be beneficial for radiotherapy.

We can refer to electrons in non-conducting materials as ‘sluggish’. Typically, they remain fixed in a location, deep inside an atomic composite. It is hence...

Im Focus: Wafer-thin Magnetic Materials Developed for Future Quantum Technologies

Two-dimensional magnetic structures are regarded as a promising material for new types of data storage, since the magnetic properties of individual molecular building blocks can be investigated and modified. For the first time, researchers have now produced a wafer-thin ferrimagnet, in which molecules with different magnetic centers arrange themselves on a gold surface to form a checkerboard pattern. Scientists at the Swiss Nanoscience Institute at the University of Basel and the Paul Scherrer Institute published their findings in the journal Nature Communications.

Ferrimagnets are composed of two centers which are magnetized at different strengths and point in opposing directions. Two-dimensional, quasi-flat ferrimagnets...

Im Focus: World's thinnest hologram paves path to new 3-D world

Nano-hologram paves way for integration of 3-D holography into everyday electronics

An Australian-Chinese research team has created the world's thinnest hologram, paving the way towards the integration of 3D holography into everyday...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Marine Conservation: IASS Contributes to UN Ocean Conference in New York on 5-9 June

24.05.2017 | Event News

AWK Aachen Machine Tool Colloquium 2017: Internet of Production for Agile Enterprises

23.05.2017 | Event News

Dortmund MST Conference presents Individualized Healthcare Solutions with micro and nanotechnology

22.05.2017 | Event News

 
Latest News

How herpesviruses win the footrace against the immune system

26.05.2017 | Life Sciences

Water forms 'spine of hydration' around DNA, group finds

26.05.2017 | Life Sciences

First Juno science results supported by University of Leicester's Jupiter 'forecast'

26.05.2017 | Physics and Astronomy

VideoLinks
B2B-VideoLinks
More VideoLinks >>>