Behavioral Biases and Investment - Yale University.pdfVIP

Behavioral Biases and Investment Massimo Massa¤ INSEAD Andrei Simonov Stockholm School of Economics October 5, 2002 Abstract We use a new and unique dataset to investigate the way investors react to prior gains/losses and the so called ”familiarity” bias. We distinguish between di¤erent behavioral theories (loss aversion, house-money e¤ect, mental accounting) and between behavioral and rational hypotheses (pure familiarity and information- based familiarity). We show that, on an yearly horizon, investors react to previous gains/losses according to the house-money e¤ect. No evidence is found of narrow accounting as investors consider wealth in its entirety and risk taking in the …nan- cial market is a¤ected by gains/losses in overall wealth, as well as …nancial and real estate wealth. In terms of individual stock picking, we provide evidence in favor of the information-based theory and show that familiarity can be considered as a proxy for the availability of information as opposed to a behavioral heuristics. JEL classi… cation: G11, G14. Keywords: Behavioral …nance, portf olio investment, loss aversion, f amiliarity bias, inf ormation. ¤Corresponding author: M. Massa, Finance Department, INSEAD, Boulevard de Constance, 77305 Fontainebleau Cedex, France. Tel: (33)1 60 72 44 81 Fax: (33)1 60 72 40 45. Email: massimo.massa@. We thank for helpful comments O.Bondarenko, F.DeJong, B.Dumas, H.Hau, P.Hillion, M.Lettau, P.Maenhout, J.Peress, P.Sodini, M.Suominen, L.Tepla, P.Veronesi, M.Weber and the participants of the Summer Financial Markets Symposium at Gerzensee. We are g