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

1. The Performance of Individual Investors 1.1 The Average Individual


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


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