Investment Mistakes of Individual Investors and the Impact of Financial Advice

33 Pages Posted: 27 Aug 2007

See all articles by Rene Fischer

Rene Fischer

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Finance and Accounting

Ralf Gerhardt

Goethe University Frankfurt - Department of Finance

Date Written: August 23, 2007

Abstract

Extensive research has demonstrated and analyzed deviations in individual investors' investment decisions from recommendations of financial theory. As there is still no structured framework for evaluating investment mistakes, we introduce a generic investment process for individual investors as guiding structure. Going along this investment process we compare findings from existing research, contrasting normative recommendations with empirical evidence about actual behavior of individual investors. We show that these deviations lead to considerable welfare losses. Therefore we present financial advice as (potentially) correcting factor in this process and construct a simple model to capture its very impact on individual investors' investment success, measured in risk-adjusted return and wealth.

Keywords: Financial Advice, Behavioral Finance, Household Portfolios, Investment Behavior

JEL Classification: D14, G29

Suggested Citation

Fischer, Rene and Gerhardt, Ralf, Investment Mistakes of Individual Investors and the Impact of Financial Advice (August 23, 2007). 20th Australasian Finance & Banking Conference 2007 Paper. Available at SSRN: https://ssrn.com/abstract=1009196 or http://dx.doi.org/10.2139/ssrn.1009196

Rene Fischer

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Finance and Accounting ( email )

Gustav-Stresemann-Ring 3
Wiesbaden, Hessen 65189
Germany

Ralf Gerhardt (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

Grueneburgplatz 1
Frankfurt, 60323
Germany

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