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 Real-time feedback helps save energy and water
08.02.2017 | Otto-Friedrich-Universität Bamberg

nachricht The Great Unknown: Risk-Taking Behavior in Adolescents
19.01.2017 | Max-Planck-Institut für Bildungsforschung

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: Breakthrough with a chain of gold atoms

In the field of nanoscience, an international team of physicists with participants from Konstanz has achieved a breakthrough in understanding heat transport

In the field of nanoscience, an international team of physicists with participants from Konstanz has achieved a breakthrough in understanding heat transport

Im Focus: DNA repair: a new letter in the cell alphabet

Results reveal how discoveries may be hidden in scientific “blind spots”

Cells need to repair damaged DNA in our genes to prevent the development of cancer and other diseases. Our cells therefore activate and send “repair-proteins”...

Im Focus: Dresdner scientists print tomorrow’s world

The Fraunhofer IWS Dresden and Technische Universität Dresden inaugurated their jointly operated Center for Additive Manufacturing Dresden (AMCD) with a festive ceremony on February 7, 2017. Scientists from various disciplines perform research on materials, additive manufacturing processes and innovative technologies, which build up components in a layer by layer process. This technology opens up new horizons for component design and combinations of functions. For example during fabrication, electrical conductors and sensors are already able to be additively manufactured into components. They provide information about stress conditions of a product during operation.

The 3D-printing technology, or additive manufacturing as it is often called, has long made the step out of scientific research laboratories into industrial...

Im Focus: Mimicking nature's cellular architectures via 3-D printing

Research offers new level of control over the structure of 3-D printed materials

Nature does amazing things with limited design materials. Grass, for example, can support its own weight, resist strong wind loads, and recover after being...

Im Focus: Three Magnetic States for Each Hole

Nanometer-scale magnetic perforated grids could create new possibilities for computing. Together with international colleagues, scientists from the Helmholtz Zentrum Dresden-Rossendorf (HZDR) have shown how a cobalt grid can be reliably programmed at room temperature. In addition they discovered that for every hole ("antidot") three magnetic states can be configured. The results have been published in the journal "Scientific Reports".

Physicist Dr. Rantej Bali from the HZDR, together with scientists from Singapore and Australia, designed a special grid structure in a thin layer of cobalt in...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Booth and panel discussion – The Lindau Nobel Laureate Meetings at the AAAS 2017 Annual Meeting

13.02.2017 | Event News

Complex Loading versus Hidden Reserves

10.02.2017 | Event News

International Conference on Crystal Growth in Freiburg

09.02.2017 | Event News

 
Latest News

Microhotplates for a smart gas sensor

22.02.2017 | Power and Electrical Engineering

Scientists unlock ability to generate new sensory hair cells

22.02.2017 | Life Sciences

Prediction: More gas-giants will be found orbiting Sun-like stars

22.02.2017 | Physics and Astronomy

VideoLinks
B2B-VideoLinks
More VideoLinks >>>