  We propose a novel explanation for classic international macro puzzles
regarding capital flows and portfolio investment, which builds on modern
macro-finance models of experience-based belief formation. Individual
experiences of past macroeconomic outcomes have been shown to exert a
long-lasting influence on beliefs about future realizations, and to explain
domestic stock-market investment. We argue that experience effects can explain
the tendency of investors to hold an over proportional fraction of their equity
wealth in domestic stocks (home bias), to invest in domestic equity markets in
periods of domestic crises (retrenchment), and to withdraw capital from foreign
equity markets in periods of foreign crises (fickleness). Experience-based
learning generates additional implications regarding the strength of these
puzzles in times of higher or lower economic activity and depending on the
demographic composition of market participants. We test and confirm these
predictions in the data.
