Investor memory of past performance is positively biased and predicts overconfidence
https://www.pnas.org/content/118/36/e2026680118
This paper makes several contributions to research in memory, overconfidence, and investment behavior.
First, we find that investors’ memories for past performance are positively biased. They tend to recall returns as better than achieved and are more likely to recall winners than losers. No published paper has shown these effects with investors.
Second, we find that these positive memory biases are associated with overconfidence and trading frequency.
Third, we validated a new methodology for reducing overconfidence and trading frequency by exposing investors to their past returns.
Debiasing memory may be more effective, and we demonstrated one way to do it. Simply making investors aware of their past returns reduces overconfidence, though it does not eliminate it completely. Brokers could easily implement this intervention by displaying prior returns on their trading platforms. Likewise, policy makers could require financial institutions to provide customers with past return information on a regular basis.