Why Do (Some) Households Trade So Much?
Juhani T. Linnainmaa
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
December 11, 2010
Review of Financial Studies, Forthcoming
AFA 2008 New Orleans Meetings Paper
When agents can learn about their abilities as active investors, they rationally "trade to learn" even if they expect to lose from active investing. The model used to develop this insight draws conclusions that are consistent with empirical study of household trading behavior: Households' portfolios underperform passive investments; their trading intensity depends on past performance; and they begin by trading small sums of money. Using household data from Finland, the paper estimates a structural model of learning and trading. The estimated model shows that investors trade to learn even if they are pessimistic about their abilities as traders. It also demonstrates that realized returns are significantly downward-biased measures of investors' true abilities.
Number of Pages in PDF File: 57
Keywords: Learning, individual investor behavior, individual investor performance, reverse survivorship bias
JEL Classification: D10, G11Accepted Paper Series
Date posted: March 20, 2007 ; Last revised: December 18, 2010
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