Behavior of Individual Investors

In: Business and Management

Submitted By cynosure
Words 3428
Pages 14
The Behavior of Individual Investors*
Brad M. Barbera and Terrance Odeanb aGraduate bHaas

School of Management, University of California, Davis, Davis, CA 95616, USA. Tel.:+1 (530) 752 0512
School of Business, University of California, Berkeley, Berkeley, CA 94720, USA. Tel.:+1 (510) 642 6767

Contents
1. The Performance of Individual Investors 1.1 The Average Individual

1535
1535

1.1.1 Long-Horizon Results 1.1.2 Short-Horizon Results 1.1.3 Market vs. Limit Orders

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1.2 Cross-Sectional Variation in Performance
1544
2. Why do Individual Investors Underperform?
1547
2.1 Asymmetric Information
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2.2 Overconfidence
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2.3 Sensation Seeking
1549
2.4 Familiarity
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3.  Disposition Effect: Selling Winners and Holding Losers
The
1551 3.1 The Evidence
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3.2 Why Do Investors Prefer to Sell Winners?
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4. Reinforcement Learning
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5. Attention: Chasing the Action
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6. Failure to Diversify
1560
7. Are Individual Investors Contrarians?
1564
8. Conclusion
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References 1565

The bulk of research in modern economics has been built on the notion that human beings are rational agents who attempt to maximize wealth while minimizing risk.These agents carefully assess the risk and return of all possible investment options to arrive at an investment portfolio that suits their level of risk aversion. Models based on these
*  e thank Nicholas Barberis, Simon Gervais, Markku Kaustia, Matti Keloharju, Andrei Simonov, Paolo
W
Sodini, Rene Stulz, Sheridan Titman, Stephen Utkus, Jing Yao, and Luo Zuo for comments on this paper.
We thank Noah Stoffman for providing us with an analysis of the disposition effect for the Finnish dataset.
Laney Smith provided valuable research assistance.
Handbook of the Economics of Finance…...

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