Experiences and Price Dynamics

Experiences affecting individuals' behavior could explain market phenomena such as time-varying risk premia, asset price bubbles or wage-price spiral.Establishing the link from individual experiences to market outcomes is challenging, as with experiences several decision-relevant factors are affected simultaneously and learning might take place.We address these issues with an laboratory experiment and investigate the role of prior experiences on subsequent investments.We investigate how experience-based learning affects individual investment behavior even in situations in which experiences do not provide new information and could be ignored.Investment decisions are in both conditions strongly affected by prior experienced outcomes, and experiences even overrides provided information.A reinforcement learning model captures the observed individual behavior and allows us to investigate market price dynamics.The described mechanism is relevant for theories and may serve as a cognitively founded explanation for self-enforcing market dynamics.Moreover, the results provide interesting practical and policy implication, as they emphasize that experienced outcomes override provided information and affecting expectations and decisions