Learning from experience and Investment decisions: A conceptual study of individual Investor Behaviour
Renuka S
Research Scholar | sreerenuka94@gmail.com
Dr. K V Raju
Academician | eboard@icai.in
“The learning dimension of experience has attracted the attention of researchers across academic disciplines. Discussion on the role of experience in personal financial decisions, and large investment decisions, have emerged in the empirical realm of behavioural economics/finance over the last two decades. This conceptual paper attempts to synthesize the concept of learning from investment experience, its preconditions, process, and implications on the investment decisions of individual investors. Knowing about how and in what ways individual investors experience affects their decision is relevant in creating experiential learning opportunities through investor education.”
Introduction: The Retail Surge in Indian Equities
The equity market in India is witnessing an upsurge in retail investor participation in recent times, more so from the onset of the COVID-19 pandemic in 2020. For instance, retail investor participation, measured using the number of Demat accounts in the country, increased from 359 lakh in 2018-19 to 551 lakh in 2020-21 (Ministry of Finance, PIB, Delhi, 2021), and to 10 crores in August 2022 (The Economic Times, September 2022).
However, low levels of financial literacy and adverse effects from market downturns on investor sentiments and behavioural biases pose a serious challenge to sustaining their growth in the stock market (OECD, 2017). The increasing number of first-time investors further creates a challenge to widen the spread and scope of investor education. In this relation, the Government of India has been taking initiatives under the aegis of the Investor Education and Protection Fund Authority (IEPA) and the Securities and Exchange Board of India (SEBI) to educate and improve awareness to help individual investors make better decisions.
Aside from formal methods of learning, individuals depend on informal sources such as learning from family and peers, media, and personal experience. A study conducted by Hogarth and Hilgert (2002) among the US population found personal experience to be the most chosen means for learning financial management. Recently, international organizations like the OECD emphasized boosting investor education through experiential learning using digital technology.
Two Strands of Academic Debate on Investor Learning
- Strand 1 (Investors Learn & Improve): Studies suggest investors do learn from their experience, progressively improving their trading behaviour and portfolio returns (e.g., Chen et al., 2004; Nicolosi et al., 2004; Seru et al., 2009).
- Strand 2 (Experience Fails to De-bias in High Stakes): Proponents like Nobel Laureate Richard Thaler (2016) argue that individuals do not necessarily learn from experience, especially in high-stakes, volatile stock market environments.
In this context, by drawing evidence from existing literature, this paper addresses: (1) the concept of learning from experience in investment decisions; (2) the preconditions and processes that facilitate experiential learning; and (3) the concrete impact of experience on investor behaviour, risk perception, and portfolio returns.
Review of Literature & Psychological Theories
One of the foremost theoretical explanations for learning from experience is Kolb’s Experiential Learning Theory (ELT) (1984) in educational psychology. The theory considers experience as a source of knowledge and explains the cyclical process of experiential learning. Although ELT has historically seen limited application in financial economics, other psychological frameworks—such as Reinforcement Learning Theory, Social Cognitive Theory, and Transformative Learning Theory—are increasingly employed to model investor behaviour (Kaustia & Knüpfer, 2008; Shantha et al., 2018).
Most empirical investigations analyze trading account histories from major brokerage houses:
- Koestner et al. (2017): Observed that as investors become experienced in trading, they achieve higher portfolio returns by learning from trading mistakes.
- Korniotis and Kumar (2009): Found older, seasoned investors exhibit lower behavioral biases and higher fundamental investment knowledge.
- Brozynski et al. (2004): Documented that herding bias among mutual fund managers declines with professional tenure.
- Chen et al. (2002): Conversely reported that among Chinese retail investors, trading errors like the disposition effect and representativeness bias actually intensified with experience.
- Primary Field Surveys (Hon-Snir et al., 2012; Shantha et al., 2018; Shantha, 2019): Disclosed that raw trading tenure alone does not directly eliminate psychological biases; rather, learning occurs only when mediated by conscious self-reflection.
Typology of Investment Learning (Figure 1)
In economics, Kenneth Arrow’s seminal ‘Learning by Doing’ (1962) views learning as a direct product of experience. In financial markets, Andrew Lo’s Adaptive Market Hypothesis (AMH) (2004) frames investors as evolving agents adapting to market feedback. Literature identifies three dichotomous learning channels:
Figure 1: Sequence & Types of Experiential Learning in Financial Markets
🟢 Rational Learning: Mistake Learning & Skill Acquisition
Preconditions for Learning from Investment Experience
Learning is highly subjective and contingent upon four prerequisite foundations:
Serves as the essential cognitive antecedent. Enhances the investor’s capacity to navigate complex instruments and determines learning preferences (Hogarth & Hilgert, 2002).
Sophisticated investors recognize cognitive pitfalls and achieve superior returns compared to novices (Campbell et al., 2014; Raut & Kumar, 2018).
Accurate knowledge of realized portfolio returns is required to diagnose mistakes; oblivious investors cannot learn (Glaser & Weber, 2007).
Wealthier investors engage in self-directed individual learning, whereas less affluent retail investors rely on social crowd-following (Yamamoto, 2005).
The Process of Learning & The Role of Memory Bias (Figure 2)
Mere years of market exposure do not guarantee de-biasing. What transforms raw experience into actionable wisdom is systematic self-reflection. However, self-reflection is bounded by human recall: investors exhibit a pronounced memory bias, recalling profitable trades while repressing losing positions (Gödker et al., 2021).
Figure 2: Cognitive Architecture of Experiential Learning in Investment Decisions
(Shantha et al., 2018)
• Beliefs (Hoffman & Post, 2013)
• Attitude (Raut, 2020)
Impact of Experiential Learning on Investment Outcomes
1. Rationalising Role on Biases
Hon-Snir et al. (2012) showed experience moderates disposition effect, overconfidence, and excessive trading frequency, driving greater rationality in portfolio allocation.
2. Asymmetric Risk Perception
Direct experience of market busts induces persistent risk aversion, whereas boom-period market entry creates aggressive risk-seeking attitudes (Anderson et al., 2019; Lejarraga et al., 2016).
3. Alpha & Return Enhancement
Experience enhances stock-selection skills, macro forecasting, and geographic diversification outside domestic markets (Abreu et al., 2011; Campbell et al., 2014; Seru et al., 2010).
Contradictory Empirical Realities
Learning is not universally linear. Xiao (2015) documented inconsistent return enhancements; Baber et al. (2020) demonstrated that chronic loss-makers frequently refuse to exit due to sunk-cost traps; and Chiang et al. (2009) confirmed that raw tenure without structured education fails to eliminate heuristic errors.
Conclusion & Policy Implications for Investor Education
Experience plays a decisive role in shaping individual investor attitudes, cognitive abilities, and portfolio health, but its benefits are not automatic. Experiential learning requires four essential preconditions: financial literacy, prior exposure, performance tracking, and capital adequacy.
Recognizing these mechanisms enables regulators (SEBI, IEPFA) and financial advisors to transition from dry classroom financial literacy to interactive, digital simulator-driven experiential education that accelerates self-reflection while insulating retail investors from catastrophic financial fallouts.
References
- Anagol, S., Balasubramaniam, V., & Ramadorai, T. (2015). The effects of experience on investor behavior: Evidence from India’s IPO lotteries. Available at SSRN, 2568748.
- Glaser, M., & Weber, M. (2007). Why inexperienced investors do not learn: they do not know their past portfolio performance. Finance Research Letters, 4(4), 203–216.
- Gödker, K., Jiao, P., & Smeets, P. (2021). Investor memory. Discussion Paper No. 07-2019-042, Network for Studies on Pension, Aging and Retirement. https://ssrn.com/abstract=3348315
- Hoffman, A. O., & Post, T. (2013). How does investor confidence lead to trading? Theory and evidence on the links between investor return experiences, confidence, and investment belief. Available at SSRN: https://ssrn.com/abstract=2361352
- Koestner, M., Loos, B., Meyer, S., & Hackethal, A. (2017). Do individual investors learn from their mistakes? Journal of Business Economics, 87(5), 669–703.
- Nicolosi, G., Peng, L., & Zhu, N. (2004). Do individual investors learn from their trading experience? Yale ICF Working Paper No. 03-32. https://dx.doi.org/10.2139/ssrn.468720
- Raut, R. K. (2020). Past behaviour, financial literacy and investment decision-making process of individual investors. International Journal of Emerging Markets, 15(6), 1243–1263.
- Seru, A., Shumway, T., & Stoffman, N. (2010). Learning by trading. The Review of Financial Studies, 23(2), 705–739.
- Shantha, K. V. A., Xiaofang, C., & Gamini, L. P. S. (2018). A conceptual framework on individual investors’ learning behavior in the context of stock trading: An integrated perspective. Cogent Economics & Finance, 6(1), 1544062.
- Shantha, K. V. A. (2019). Individual investors’ learning behavior and its impact on their herd bias: An integrated analysis in the context of stock trading. Sustainability, 11(5), 1448.