BARBER, Brad M. and Terrance ODEAN, 2000. Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors, The Journal of Finance, Vol. 55, No. 2. (Apr., 2000), pp. 773-806. [Cited by 307] (48.26/year)
Abstract: "Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent. The average household earns an annual return of 16.4 percent, tilts its common stock investment toward high-beta, small, value stocks, and turns over 75 percent of its portfolio annually. Overconfidence can explain high trading levels and the resulting poor performance of individual investors. Our central message is that trading is hazardous to your wealth."
ANDERSSON, Patric, 2004. How well do financial experts perform? A review of empirical research on performance of analysts, day-traders, forecasters, fund managers, investors, and stockbrokers. [not cited] (0/year)
Abstract: "In this manuscript, empirical research on performance of various types of financial experts is reviewed. Financial experts are used as the umbrella term for financial analysts, stockbrokers, money managers, investors, and day-traders etc. The goal of the review is to find out about the abilities of financial experts to produce accurate forecasts, to issue profitable stock recommendations, as well as to make successful investments and trades. On the whole, the reviewed studies show discouraging tendencies of financial experts."
BARBER, B.M. and T. ODEAN, 1999. The Courage of Misguided Convictions. Financial Analysts Journal, November 1999, Vol. 56, No. 6: 41-55. [Cited by 47] (6.38/year)
Abstract: "The field of modern financial economics assumes that people behave with extreme rationality, but they do not. Furthermore, people's deviations from rationality are often systematic. Behavioral finance relaxes the traditional assumptions of financial economics by incorporating these observable, systematic, and very human departures from rationality into standard models of financial markets. We highlight two common mistakes investors make: excessive trading and the tendency to disproportionately hold on to losing investments while selling winners. We argue that these systematic biases have their origins in human psychology. The tendency for human beings to be overconfident causes the first bias in investors, and the human desire to avoid regret prompts the second."
BARBER, B.M., et al., 2005. Who Loses from Trade? Evidence from Taiwan. University of California, Berkeley, working paper. [Cited by 7] (5.14/year)
Abstract: "We document systematic and, more importantly, economically large wealth transfers occur between institutional and individual investors in financial markets. Using a complete trading history of all investors in Taiwan, we document that the aggregate portfolio of individual investors suffers an annual performance penalty of 3.8 percentage points. The return shortfall is equivalent to 2.2 percent of Taiwan’s GDP or 2.8 percent of total personal income – nearly as much as the total private expenditure on clothing and footwear in Taiwan. In contrast, institutions enjoy an annual performance boost of 1.5 percentage points (after commissions and taxes, but before other costs)."
BARBER, B.M., et al., 2004. Who Gains from Trade? Evidence from Taiwan. University of California, Berkeley. [Cited by 7] (2.96/year)
Abstract: "In the presence of information and trading costs, informed investors should profit from uninformed investors. We test this proposition by analyzing the performance of institutional and individual investors using trades data for all market participants in the Taiwan stock market during the five years ending in 1999. Before considering trading costs (commissions and transaction taxes), on the average day, institutions realize trading profits of $NT 178 million, while individual investors lose the same amount. In general, the gains to institutions are not offset by their trading costs, while trading costs exacerbate the losses of individuals. After costs, we estimate that the trading of institutional investors adds one percentage point annually to their portfolio performance, while the trading of individuals subtracts over three percentage points annually from their performance. All major institutional categories (corporations, dealers, foreigners, and mutual funds) earn profits before costs. Only corporations fail to do so after costs. We also map trades to orders, which we classify as aggressive (demanding liquidity) or passive (providing liquidity) based on order prices. Virtually all trading losses incurred by individuals can be traced to their aggressive orders. In contrast, institutions profit from both their passive and aggressive trades. Most of the institutional profits from passive trades, which provide liquidity to market participants, are accrued within a few days of the trade. In contrast, most of the institutional profits from their aggressive trades accrue at horizons up to six months. All of the gains from trade are exhausted within six months."
Barber, Brad M., Lee, Yi-Tsung, Liu, Yu-Jane and Odean, Terrance, Just How Much Do Individual Investors Lose by Trading? (October 2006). AFA 2006 Boston Meetings Paper
Abstract: "We document that individual investor trading results in systematic and, more importantly, economically large losses. Using a complete trading history of all investors in Taiwan, we document that the aggregate portfolio of individual investors suffers an annual performance penalty of 3.8 percentage points. Individual investor losses are equivalent to 2.2 percent of Taiwan's GDP or 2.8 percent of total personal income – nearly as much as the total private expenditure on clothing and footwear in Taiwan. Using orders underlying trade, we document that virtually all of individual trading losses can be traced to their aggressive orders; passive orders placed by individuals are profitable at short horizons and suffer modest losses at longer horizons. In contrast, institutions enjoy an annual performance boost of 1.5 percentage points (after commissions and taxes, but before other costs). Both the aggressive and passive trades of institutions are profitable."
Never mind that another set of numbers shows that these equations do not seem to work very well: these statistics reveal that between 75 percent and 90 percent of all futures traders lose money in any given year [20, p. 313].
[20] KENNETH M. MORRIS and VIRGINIA B. MORRIS, The Wall
Street Journal Guide to Understanding Money and Investing,
Lightbulb Press, New York, NY, 1999.
Success Rates of Traders
"just over a third of traders made money"
"This study found that 18 of the 26 accounts lost money."
"Our central message is that trading is hazardous to your wealth."
This paper explicitly models investor behaviour in financial markets allowing for traits linked to a notion of imperfect rationality. We study an extreme form of posterior overconfidence where some risk neutral investors overestimate the precision of their private information. They compete in market orders with another group of informed traders who have rational expectations. The participation of overconfident traders in the market leads to higher transactions volume, larger depth, more volatile and more informative prices. More importantly, such traders may make higher expected profits than rational ones and may even earn more than if they switched to rational behaviour. Their unconscious commitment to aggressive trading offers them a ‘first mover advantage'. I consider an extension with risk averse market makers and find that the nature of results depends on whether exogenous noise trading exists.
Usingaudit trail data for a sample of NYSE firms we show that medium-size trades
are associated with a disproportionately large cumulative stock price change relative to
their proportion of all trades and volume. This result is consistent with the predictions
of Barclay and Warner’s (1993) stealth-tradinghypothesis. We find that the source of
this disproportionately large cumulative price impact of medium-size trades is trades
initiated by institutions. This result is robust to various sensitivity checks. Our findings
appear to confirm street lore that institutions are informed traders.
The authors present a model of portfolio allocation by noise traders with incorrect expectations about return variances. For such misperceptions, noise traders who do not affect prices can earn higher expected returns than rational investors with similar risk aversion. Moreover, such noise traders can come to dominate the market in that the probability that they eventually have a high share of total wealth is close to one. Noise traders come to dominate despite their taking of excessive risk and their higher consumption. The authors conclude that the case against their long-run viability is not as clear-cut as is commonly supposed.
FRENCH, K.R. and R. ROLL, 1986. Stock return variances: The arrival of information and the reaction of traders. Journal of Financial Economics. [Cited by 359] (18.18/year)
GANDAR, John M., William H. DARE, Craig R. BROWN, and Richard A. ZUBER, 1998. Informed Traders and Price Variations in the Betting Market for Professional Basketball Games, Journal of Finance, LIII(1):385--401, 1998. [Cited by 1] (0.13/year)
Recent research has proposed several ways in which overcon"dent traders can persist
in competition with rational traders. This paper o!ers an additional reason: overcon"-
dent traders do better than purely rational traders at exploiting mispricing caused by
liquidity or noise traders. We examine both the static pro"tability of overcon"dent versus
rational trading strategies, and the dynamic evolution of a population of overcon"dent,
rational and noise traders. Replication of overcon"dent and rational types is assumed to
be increasing in the recent pro"tability of their strategies. The main result is that the
long-run steady-state equilibrium always involves overcon"dent traders as a substantial
positive fraction of the population.
This paper examines the behavior of institutional traders using unique data on the equity transactions of 21 institutions of differing investment styles during 1991-1993. The data provide a detailed account of the anatomy of the trading process, and include information on the number of days needed to fill an order and types of order placement strategies employed. We analyze the motivations for trade, the determinants of trade duration, and the choice of order type. The analysis provides some support for the predictions made by theoretical models, but suggests that these models fail to capture important dimensions of trading behavior.
Journal of Financial Economics, Volume 37, Number 3, March 1995, pp. 371-398
This study separates trading volume into buyer- and seller-initiated activities and examines the directional volume reaction in small and large trades to different types of earnings news. ‘Good’ (‘bad’) news triggers brief, but intense, buying (selling) in the large trades. However, a persistent period of unusually high buying activity is observed in the small trades irrespective of the news. This anomalous proclivity of small traders to buy is robust across firm size, trading volume, and different earnings expectation models. Several explanations are discussed, although the behavior does not seem fully explained by existing theories.
People are overconfident. Overconfidence affects financial markets. How depends on who in the market is overconfident and on how information is distributed. This paper examines markets in which price-taking traders, a strategic-trading insider, and risk-averse marketmakers are overconfident. Overconfidence increases expected trading volume, increases market depth, and decreases the expected utility of overconfident traders. Its effect on volatility and price quality depend on who is overconfident. Overconfident traders can cause markets to underreact to the information of rational traders. Markets also underreact to abstract, statistical, and highly relevant information, and they overreact to salient, anecdotal, and less relevant information.
The authors investigate whether the degree of autocorrelation shown by high frequency stock returns changes with volatility. This may result from nontrading effects, feedback trading strategies, or variable risk aversion. The authors' results indicate that when volatility is low, daily (and hourly) stock returns exhibit positive autocorrelation, but when it is high, returns exhibit negative serial correlation. They also find an important asymmetry--negative serial correlation is more likely after price declines. This is consistent with price declines being more likely to induce positive feedback trading. The authors also find no significant relation between margin requirements and the autocorrelation of returns.