Abstract:

Investing in the stock market is a pivotal decision in households finance. Stock investment is substantially more profitable than investment in other asset classes. We experimentally test stock market participation and how financial memories influence it. Participants invest in a stock and they are compensated based on the actual price realization of that stock. We conduct two experiments. In the first experiment we elicit participants’ memories about the stock market before or after the investment task. The Memory Treatment polarizes the level of the amount invested in the stock. In the Memory Treatment, positive memories increase the level invested compared to recalling non-positive ones. Moreover, the Memory treatment decreases the amount invested by those who have non-positive memories. In the second experiment, we elicit memories before the investment for all participants. After eliciting memories and before the investment task we provide, to a subset of participants, positive and truthful financial information about the stock they are about to invest in. While information provision increases investment, it only does so for those that recall non-personal memories, as opposed to personal ones. We rationalize our findings in light of a memory-based model that builds upon two main elements of memory recall: similarity and interference.