The Behavior of Individual Investors
Brad M. Barber
University of California, Davis
University of California, Berkeley - Haas School of Business
September 7, 2011
We provide an overview of research on the stock trading behavior of individual investors. This research documents that individual investors (1) underperform standard benchmarks (e.g., a low cost index fund), (2) sell winning investments while holding losing investments (the “disposition effect”), (3) are heavily influenced by limited attention and past return performance in their purchase decisions, (4) engage in naïve reinforcement learning by repeating past behaviors that coincided with pleasure while avoiding past behaviors that generated pain, and (5) tend to hold undiversified stock portfolios. These behaviors deleteriously affect the financial well being of individual investors.
Number of Pages in PDF File: 54
Keywords: individual investors
JEL Classification: D12, G11, H31working papers series
Date posted: June 27, 2011 ; Last revised: January 6, 2012
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