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Investor Competence, Trading Frequency, and Home Bias

John R. Graham
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Campbell R. Harvey
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Hai Huang
Duke University - Finance


May 2006

AFA 2006 Boston Meetings Paper

Abstract:     
People are more willing to bet on their own judgments when they feel skillful or knowledgeable (Heath and Tversky, 1991). We investigate whether this 'competence effect' influences trading frequency and home bias. We find that investors who feel competent trade more often and have more internationally diversified portfolios. We also find that male investors, and investors with larger portfolios or more education, are more likely to perceive themselves as competent than are female investors, and investors with smaller portfolios or less education. Our paper also contributes to understanding the theoretical link between overconfidence and trading frequency. Existing theories on trading frequency have focused on one aspect of overconfidence, i.e., miscalibration. Our paper offers a potential mechanism for the 'better-than-average' aspect of overconfidence to influence trading frequency. In the context of our paper, overconfident investors tend to perceive themselves to be more competent, and thus are more willing to act on their beliefs, leading to higher trading frequency.

Keywords: Behavioral Finance, Investment, Competence, Ambiguity, Stock Trading Frequency, Home Bias

JEL Classifications: G11, G15, F30, G12

Working Paper Series

Date posted: November 18, 2004 ; Last revised: May 31, 2006

Suggested Citation

Graham, John R., Harvey, Campbell R. and Huang, Hai , Investor Competence, Trading Frequency, and Home Bias (May 2006). AFA 2006 Boston Meetings Paper. Available at SSRN: http://ssrn.com/abstract=620801


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Contact Information

Campbell R. Harvey (Contact Author)
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
John Robert Graham
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Hai Huang
Duke University - Finance ( email )
Durham, NC 27708-0120
United States
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