Overtrading

Wai Mun Fong
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Wai Mun Fong: National University of Singapore

Chapter 2 in The Lottery Mindset: Investors, Gambling and the Stock Market, 2014, pp 25-45 from Palgrave Macmillan

Abstract: Abstract A standard prescription of modern portfolio theory is that uninformed investors should follow a buy-and-hold investment strategy to minimize the cost of active trading. Individual investors deviate systematically from this prescription. This chapter surveys empirical evidence on the trading behavior of individual investors around the world. An unambiguous finding from the literature is that individual investors trade too much and to their detriment. Losses from trading are amplified due to investors’ preference for lotterytype stocks such as those with high idiosyncratic volatility. Losses of individual investors are gains to institutional investors. Contrary to the predictions of rational learning theories, investors with a history of losses persist in trading actively. Explanations for active trading based on psychology and behavioral finance research are discussed.

Keywords: overconfidence; sensation-seeking; turnover (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-38173-6_2

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DOI: 10.1057/9781137381736_2

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