The double-channeled effects of experience on individual investment decisions: experimental evidence

Investors in the financial markets typically have access to both descriptive information of assets, from brochures, financial analysts, reports, etc., and own experience.However, little is known about the role of experience in investment decisions. This paper investigates this issue by experimentally testing the effects of experience in aninvestment task with choice feedback and varying levels of descriptive information. We document the double-channeled effects of experience: when elicited beliefs were controlledfor, participants significantly relied on experience regardless of the descriptions, behaving consistently with the law of effect; additionally, beliefs were also distorted by experience, in that participants were more optimistic about assets from which they gained, and pessimistic about previously unowned assets. In a calibration exercise, reinforcement learning significantly added predictive power to expected utility models.