Periodic Reporting for period 1 - PBDM (Payoff-Based Decision-Making)
Période du rapport: 2018-06-01 au 2020-05-31
This project investigates the effects of personal payoff experiences on subsequent decisions in repeated settings under uncertainty with feedback. The project will first build a theoretical framework integrating the effects of experienced payoffs on both risk attitudes and beliefs. In the model, payoffs influence risk preferences, relaxing the assumption that preferences are stable; payoffs also distort information processing, causing belief biases. I will model this as an individual investor’s portfolio choice problem, and generate implications for behavior and for asset price dynamics. The theoretical results will be tested experimentally and empirically. I will use one experiment to establish the validity of theoretical predictions in a controlled setting where payoff experiences vary across treatments, with all other things equal. The other experiment complements the first by disentangling the competing preference and belief mechanisms with the help of brain scanning technology. Finally, the external validity will be checked in an empirical study using individual investors’ trading and pension choices data. The data contain survey results of investors’ beliefs towards own investments and the market, providing a natural ground for a test of my theory. Understanding of the payoff-based decision-making mechanism in finance can potentially shed light on other behavioral patterns in financial decision-making, such as herding and style investing. This project will thus generate important policy implications for individual investors to improve their welfare, for financial firms to make profits, and for policy makers to enhance market efficiency.
I have completed a theoretical model and an experiment for the first paper. The model is about how individual payoff experience could distort belief formation and updating. The model predicts that previous gains (losses) make an agent relatively overweight positive (negative) information when updating beliefs, and thus become over-optimistic (over-pessimistic) than a Bayesian decision maker. The experiments so far conducted respectively test two aspects of the model, namely whether previous payoffs bias beliefs, and whether the belief bias is mediated by biased information processing. From the experiments, I obtained results that could confirm the predictions of my model.
The paper has been finished and I have presented paper in several conferences and seminars to disseminate the results. These include seminar at the Centre for Experimental Social Sciences, Nuffield College; Department of Economics, University of Oxford; ETH-Zurich; Department of Economics, Erasmus University Rotterdam; University of East Anglia; School of Management, Fudan University; Department of Economics, Shanghai University of Finance and Economics; Department of Economics, University of Glasgow; Department of Finance, Leicester University; Department of Finance, Maastricht University; Nankai University; Colby College, the Tinbergen Institute; University of Gothenburg; Centre for Experimental Social Sciences, Santiago, Chile; Society for Experimental Finance Meeting; Maastricht Behavioral and Experimental Economics Symposium, Economic Science Association Meeting, Games World Congress meeting.
Now the paper has been conditionally accepted at the Economic Journal.
The Marie Curie funding will further support my investigation of this topic. For instance, I have also conducted experiments on whether and how past payoff experience could influence the decision maker's ambiguity attitudes; whether the objective account of past experience or individuals' subjective memory of past experience influence behavior.
We have completed the experiments on subjective memory. The project contains a model and an experiment on how investors mis-remember past gains and losses to support their positive self-image. We document that after investing in an risky asset, investors over-remember positive outcomes of the asset compared with negative outcomes. We have presented the paper at University of Oxford, Maastricht University, University of Bonn, European Economic Association Meeting, American Finance Association Meeting, Society for Experimental Finance Meeting, Dongbei University of Finance and Economics, International Meeting on Behavioral and Experimental Social Sciences, Economic Science Association Meeting, etc. The paper has been finished and is currently under review at the top economics journal, the American Economic Review.
The project on ambiguity attitudes contains an experiment to test whether previous gains and losses ambiguous situations could shape the decision maker's subsequent ambiguity attitude. The ambiguous situation we introduce in the lab is the stock market, a natural setting. And in this project we implement an innovative belief elicitation method that could jointly estimate subjects' ambiguity attitudes and ambiguity-neutral probabilistic beliefs. The experiment for this project is currently in progress.
The paper has been finished and I have presented paper in several conferences and seminars to disseminate the results. These include seminar at the Centre for Experimental Social Sciences, Nuffield College; Department of Economics, University of Oxford; ETH-Zurich; Department of Economics, Erasmus University Rotterdam; University of East Anglia; School of Management, Fudan University; Department of Economics, Shanghai University of Finance and Economics; Department of Economics, University of Glasgow; Department of Finance, Leicester University; Department of Finance, Maastricht University; Nankai University; Colby College, the Tinbergen Institute; University of Gothenburg; Centre for Experimental Social Sciences, Santiago, Chile; Society for Experimental Finance Meeting; Maastricht Behavioral and Experimental Economics Symposium, Economic Science Association Meeting, Games World Congress meeting.
Now the paper has been conditionally accepted at the Economic Journal.
The Marie Curie funding will further support my investigation of this topic. For instance, I have also conducted experiments on whether and how past payoff experience could influence the decision maker's ambiguity attitudes; whether the objective account of past experience or individuals' subjective memory of past experience influence behavior.
We have completed the experiments on subjective memory. The project contains a model and an experiment on how investors mis-remember past gains and losses to support their positive self-image. We document that after investing in an risky asset, investors over-remember positive outcomes of the asset compared with negative outcomes. We have presented the paper at University of Oxford, Maastricht University, University of Bonn, European Economic Association Meeting, American Finance Association Meeting, Society for Experimental Finance Meeting, Dongbei University of Finance and Economics, International Meeting on Behavioral and Experimental Social Sciences, Economic Science Association Meeting, etc. The paper has been finished and is currently under review at the top economics journal, the American Economic Review.
The project on ambiguity attitudes contains an experiment to test whether previous gains and losses ambiguous situations could shape the decision maker's subsequent ambiguity attitude. The ambiguous situation we introduce in the lab is the stock market, a natural setting. And in this project we implement an innovative belief elicitation method that could jointly estimate subjects' ambiguity attitudes and ambiguity-neutral probabilistic beliefs. The experiment for this project is currently in progress.
The state of the art in the economics and finance literature regarding personal experience is scarce. Most studies only casually talk about the effects of personal experience. Empirical studies could not clearly identify the influence of personal experience, due to other confounds. Theoretical papers focus mostly on how experienced payoffs could influence risk attitudes, namely different versions of the house money effect. However, a complete picture and clean test of the effect of personal experience is lacking. My projects, financed by the Marie Curie Individual Fellowship, will greatly advance our knowledge about how individuals learn from their past experience, and how personally experienced gains and losses influence subsequent beliefs, preferences, and choices.
I expect to complete a series of theoretical, experimental and empirical projects on this topic. These projects will generate results that can greatly advance our knowledge about experience-based learning, bridging a gap in the academic literature.
The outcomes of these projects will also generate value beyond academia. For instance, an immediate application of these results is in the financial market. If we have a better understanding of how individual investors learn from past experience to update belief about their own skills, the market or specific assets, we could potentially design better individual investor education programs, such as those offered at the Individual Investor Association in the US, in order to improve their investment performance and welfare. From a more general level, we could then design better financial policies to improve the efficiency of financial markets.
Experience generally plays an important role in many facets of life, whenever it involves repeated decision-making, feedback and uncertainty. This means the applicability of my results goes far beyond the financial market. The results in general will help individuals make better decisions when they have information about the outcomes from previous similar choice situations.
I expect to complete a series of theoretical, experimental and empirical projects on this topic. These projects will generate results that can greatly advance our knowledge about experience-based learning, bridging a gap in the academic literature.
The outcomes of these projects will also generate value beyond academia. For instance, an immediate application of these results is in the financial market. If we have a better understanding of how individual investors learn from past experience to update belief about their own skills, the market or specific assets, we could potentially design better individual investor education programs, such as those offered at the Individual Investor Association in the US, in order to improve their investment performance and welfare. From a more general level, we could then design better financial policies to improve the efficiency of financial markets.
Experience generally plays an important role in many facets of life, whenever it involves repeated decision-making, feedback and uncertainty. This means the applicability of my results goes far beyond the financial market. The results in general will help individuals make better decisions when they have information about the outcomes from previous similar choice situations.