Description and experience: How experimental investors learn about booms and busts affects their financial risk taking

Abstract

A few years ago, the world experienced the most severe economic crisis since the Great Depression. According to the depression baby hypothesis, people who live through such macroeconomic shocks take less financial risk in their future lives (e.g., lower stock market participation). This hypothesis has previously been tested against survey data. Here, we tested it in a simulated experimental stock market (based on the Spanish stock index, IBEX-35), varying both the length of historical data available to participants (including or excluding a macroeconomic shock) and the mode of learning about macroeconomic events (through sequential experience or symbolic descriptions). Investors who learned about the market from personal experience took less financial risk than did those who learned from graphs, thus echoing the description-experience gap observed in risky choice. In a second experiment, we reversed the market, turning the crisis into a boom. The description-experience gap persisted, with investors who experienced the boom taking more risk than those who did not. The results of a third experiment suggest that the observed gap is not driven by a wealth effect, and modeling suggests that the description-experience gap is explained by the fact that participants who learn from experience are more risk averse after a negative shock. Our findings highlight the crucial role of the mode of learning for financial risk taking and, by extension, in the legally required provision of financial advice.

Competitive escalation and interventions

“…Learning from both the vicarious-learning intervention and from experience of the dollar auction did not have a stronger effect than first-hand learning (from experiencing the dollar auction) alone. This finding is in line with recent evidence from the effects of different types of experience on investment decisions: Lejarraga, Woike, and Hertwig (2016) showed that experience in investing in funds allows for a different kind of learning than analyzing the fund's past performance without investing.…”

Promoting the use of probabilistic weather forecasts through a dialogue between scientists, developers and end‐users

“…Second, users can gain experience with probabilistic information and their various representations before their understanding is tested or before they evaluate the representations (Hogarth and Soyer, ; Lejarraga et al . ; Wulff et al . , discuss the importance of experience in decision making).…”

Learning From Peers’ Eye Movements in the Absence of Expert Guidance: A Proof of Concept Using Laboratory Stock Trading, Eye Tracking, and Machine Learning

“…This is in line with research showing that good performance in repeated tasks relies on executing special purpose visual routines that process only the minimum required information (Hayhoe, 2000), and that this allows for faster learning with fewer errors (Hullinger, Kruschke, & Todd, 2015). Consistent with existing work in behavioral finance (Chang, Solomon, & Westerfield, 2016;Kuhnen, Rudorf, & Weber, 2017), focusing on the price change history directly before making the choice could also indicate a lower cognitive dissonance or more accurate updating of one's beliefs, no longer distorted by information about one's subjective experience with the stock (also see Lejarraga, Woike, & Hertwig, 2016, for more work on learning from experience versus description in experimental stock markets).…”