The Effect of Past Performance Framing on Investorss Belief Updating

Abstract

Prior research shows that smaller belief updates are associated with less active trading, which positively affects investors’ returns. Can different default frames of presenting past return information affect investors’ belief updating, and reduce updates in their beliefs? In this paper, we analyze whether presenting longer information horizons as a default is associated with smaller belief updates. In lab and field experiments, we expose subjects to different past return information defaults and measure updates in beliefs. Different from previous research, our subjects can easily opt out of the default to obtain additional information. We find that presenting long-term return information is not effective in reducing belief updates on average. Belief updates are reduced for subjects who remain in their default, while for others, we observe the opposite.