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The Behavior of Individual Investors

54 Pages Posted: 27 Jun 2011 Last revised: 6 Jan 2012

Brad M. Barber

University of California, Davis

Terrance Odean

University of California, Berkeley - Haas School of Business

Date Written: September 7, 2011

Abstract

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.

Keywords: individual investors

JEL Classification: D12, G11, H31

Suggested Citation

Barber, Brad M. and Odean, Terrance, The Behavior of Individual Investors (September 7, 2011). Available at SSRN: https://ssrn.com/abstract=1872211 or http://dx.doi.org/10.2139/ssrn.1872211

Brad M. Barber

University of California, Davis ( email )

Graduate School of Management
One Shields Avenue
Davis, CA 95616
United States
530-752-0512 (Phone)
530-752-2924 (Fax)

Terrance Odean (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-6767 (Phone)
510-666-2561 (Fax)

HOME PAGE: http://www.haas.berkeley.edu/faculty/odean.html

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