Investor Memory

The Formation of Risk Preferences Through Small-Scale Events

“…Comparing our finding that faulty memories are not used in the absence of an anticipatory component to studies that have confirmed the use of biased memories when the anticipatory component is present (e.g., Gödker et al, 2019, Zimmermann, 2020 suggests that this component may be necessary for the actual use of faulty memories when making decisions; a finding that provides support for a core assumption in the motivated beliefs literature.…”

Investor memory of past performance is positively biased and predicts overconfidence

“…For instance, Erik Davidson, the chief investment officer for Wells Fargo, provided his intuition for the source of investor overconfidence: “Much like our human predisposition toward nostalgia about the past, where we only remember the good times and gloss over the bad, investors likewise tend to take a nostalgic view of their past winners but forget about their past losing investments” ( 7 ). Similarly, theoretical economic models have suggested that positively biased memory could contribute to overconfidence ( 8 ), and laboratory evidence suggests participants have stronger memories for positive versus negative financial outcomes ( 9 ). More generally, research has shown that people fill in gaps in memory using unreliable cues, which can lead to overconfidence ( 10 , 11 ).…”

Motivated Procrastination

“…3 The suppression of negative news through 'motivated memory' has been documented as an important channel for motivated beliefs in other decision environments (see, e.g., Zimmermann, 2020;Gödker et al, 2021). vated beliefs are action-relevant while ensuring that elicited beliefs are not biased through the allocation decision nor bias the latter.…”