Is Zero Return a Natural Benchmark for Investors? An Investigation with Individual Trading Records

46 Pages Posted: 25 May 2011 Last revised: 16 Mar 2012

See all articles by Rahul Chhabra

Rahul Chhabra

Indian School of Business (ISB), Hyderabad

Sankar De

Independent

Naveen R. Gondhi

Indian School of Business (ISB), Hyderabad

Bhimasankaram Pochiraju

Indian School of Business (ISB), Hyderabad

Multiple version iconThere are 2 versions of this paper

Date Written: January 20, 2012

Abstract

Using a unique and large dataset of trading records, we find that individual investors view zero returns as a natural benchmark for their trading performance. They increase both buy and sell trading volume if their past investment outcomes are positive, and decrease them if the outcomes are negative, but appear to care much less for the size of the same outcomes (gains as well as losses). We also find that this trading behavior is non-rational; it results in economically significant declines in profits from current trades even without taking into account transactions costs. While our findings support the age-old knowledge that human thought processes are heavily influenced by the distinction between positive and negative numbers, our research strategy is motivated by recent research in experimental psychology that documents that individual subjects are more sensitive to the presence or absence of a stimulus than to its magnitude. Our findings provide new and empirically testable explanations for a number of extensively documented phenomena in finance and accounting, including excessive trading by overconfident investors.

Keywords: individual investors, institutional investors, trading behavior, overconfidence, rationality

JEL Classification: D19, G14

Suggested Citation

Chhabra, Rahul and De, Sankar and Gondhi, Naveen R. and Pochiraju, Bhimasankaram, Is Zero Return a Natural Benchmark for Investors? An Investigation with Individual Trading Records (January 20, 2012). Available at SSRN: https://ssrn.com/abstract=1846474 or http://dx.doi.org/10.2139/ssrn.1846474

Rahul Chhabra

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Sankar De (Contact Author)

Independent ( email )

Villa 286 bTR
Srisalam Highway
Hyderabad, Telengana
+91 7042662505 (Phone)

Naveen R. Gondhi

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Bhimasankaram Pochiraju

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
90
Abstract Views
1,651
rank
123,944
PlumX Metrics