We find a strong positive link between past IPO returns and future subscriptions at the investor level in Finland. Our setting allows tracing this effect to the returns personally experienced by investors. The effect is not explained by patterns related to the IPO cycle, or wealth effects. This behavior is consistent with reinforcement learning, in which personally experienced outcomes are overweighted compared to rational Bayesian learning. The results provide a microfoundation for the argument that investor sentiment drives IPO demand. The paper also contributes to understanding how popular investment styles develop, and has implications for the marketing of financial products.
Peer performance can influence the adoption of financial innovations and investment styles. We present empirical evidence of this type of social influence: recent stock market returns that local peers experience strongly influence an individual's stock market entry decision. This effect is limited to positive returns that encourage entry, whereas negative returns do not make entry less likely. Market returns, media coverage, returns on locally held stocks, omitted local variables, and stock purchases within households do not drive our results. This type of social influence may partly explain, among other things, why participation rates tend to sharply increase in times of high market returns.
We trace the impact of formative experiences on portfolio choice. Plausibly exogenous variation in workers’ exposure to a depression allows us to identify the effects and a new estimation approach makes addressing wealth and income effects possible. We find that adversely affected workers are less likely to invest in risky assets. This result is robust to a number of control variables and it holds for individuals whose income, employment, and wealth were unaffected. The effects travel through social networks: individuals whose neighbors and family members experienced adverse circumstances also avoid risky investments.
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