Behavioral Biases and Investor Performance
12 Pages Posted: 11 Nov 2011
Date Written: November 10, 2011
Research indicates that individual investors trade excessively and underperform the market indices, Barber and Odean (2000). The purpose of this paper is to help explain which behavioral biases, if any, can explain this result using a simulation approach. Results indicate that putting too much weight on the current environment, anchoring, is the largest factor in explaining individual investor underperformance. In addition, loss aversion is the largest factor to explain excessive trading. When these two biases are combined trading activity and underperformance are heightened.
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Keywords: Behavioral finance, agent-based models, financial markets
JEL Classification: C63, G01, G10
Suggested Citation: Suggested Citation