Winners Earn, Losers Learn? The Effect of New Venture Success on Crowdfunders’ Investment Decisions

Conference Paper
Academy of Management Proceedings 2019(1), 12730
Authors

Jan Niklas Wick

Christoph Ihl

Published

August 1, 2019

Doi

10.5465/AMBPP.2019.12730abstract

Abstract
In early-stage venture financing, investors’ portfolio returns crucially depend on investing in the few “big hits,” compensating for a significant number of investments that fail to return the invested capital. The recently established equity crowdfunding enables also retail investors to participate in the market for early-stage venture financing. Using survival analysis on a data set that tracks portfolios of individual equity crowdfunding investors over the course of more than five years, we study how personal and common liquidity events—i.e., realized and foregone losses and gains—impact an individual’s future investment behavior. Reinforcement learning theory predicts that investors overweight personal experience when making investment decisions. We find that in our context of a closed, specialized market, both personal and common liquidity events have a negative effect on subsequent investment decisions. Differentiating these findings by investor sophistication, we find that less sophisticated investors exhibit patterns of reinforcement learning.

Research

© Anne Gärtner

  • Conference Paper
  • 2019
  • Vol. 2019(1)
  • DOI

Authors

Jan Niklas Wick, Christoph Ihl

Abstract

In early-stage venture financing, investors’ portfolio returns crucially depend on investing in the few “big hits,” compensating for a significant number of investments that fail to return the invested capital. The recently established equity crowdfunding enables also retail investors to participate in the market for early-stage venture financing. Using survival analysis on a data set that tracks portfolios of individual equity crowdfunding investors over the course of more than five years, we study how personal and common liquidity events—i.e., realized and foregone losses and gains—impact an individual’s future investment behavior. Reinforcement learning theory predicts that investors overweight personal experience when making investment decisions. We find that in our context of a closed, specialized market, both personal and common liquidity events have a negative effect on subsequent investment decisions. Differentiating these findings by investor sophistication, we find that less sophisticated investors exhibit patterns of reinforcement learning.

Tags

Crowdfunding Investment Decisions Learning