Belief Updating and Investment Decisions: The Impact of Good or Bad News Varies With Prior Returns

75 Pages Posted: 11 Oct 2021 Last revised: 11 Feb 2022

See all articles by Kevin Trutmann

Kevin Trutmann

Faculty of Psychology, University of Basel

Steve Heinke

University of Basel

Jörg Rieskamp

University of Basel

Date Written: January 14, 2022

Abstract

Combining prior findings on belief formation implies that investors' belief updating depends on an interaction between information favorability and the sign of the investment's return.

In a pre-registered experiment we observe the hypothesized expectation dynamics, leading to known profit harming trading behaviors.

A context sensitive Reinforcement Learning model describes this expectation formation best and its complexity is justified by the data.

As the main driver of the interaction we observe that learning from unfavorable information is stronger for gain compared to loss positions.

Providing participants with additional information about the price movements mitigates these effects.

Keywords: beliefs, expectations, reinforcement learning, information, disposition effect, investing, cognitive model

JEL Classification: D01, D12, D83, D84, G11, G41

Suggested Citation

Trutmann, Kevin and Heinke, Steve and Rieskamp, Jörg, Belief Updating and Investment Decisions: The Impact of Good or Bad News Varies With Prior Returns (January 14, 2022). Available at SSRN: https://ssrn.com/abstract=3935798 or http://dx.doi.org/10.2139/ssrn.3935798

Kevin Trutmann (Contact Author)

Faculty of Psychology, University of Basel ( email )

Missionsstrasse 62a
Basel, CH-4055
Switzerland

Steve Heinke

University of Basel ( email )

Missionsstrasse 62a
Basel, 4055
Switzerland

Jörg Rieskamp

University of Basel

Petersplatz 1
Basel, CH-4003
Switzerland

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