Do Day Traders Rationally Learn About Their Ability?

35 Pages Posted: 9 Dec 2014

See all articles by Brad M. Barber

Brad M. Barber

University of California, Davis

Yi-Tsung Lee

Peking University - Guanghua School of Management

Yu-Jane Liu

Peking University - Guanghua School of Management

Terrance Odean

University of California, Berkeley - Haas School of Business

Date Written: December 8, 2014

Abstract

We analyze the performance of and learning by individual investors who engage in day trading in Taiwan from 1992 to 2006 and test the proposition that individual investors rationally speculate as day traders in order to learn whether they possess the superior trading ability. Consistent with models of both rational and biased learning, we document that unprofitable day traders are more likely to quit and that day traders begin with relatively small trades that increase as they gain experience. Inconsistent with models of rational speculation and learning, we document that the aggregate performance of day traders is negative and that over half of day trading can be traced to traders with considerable experience and a history of losses.

Keywords: learning, day traders, day trading, individual investors, Taiwan

JEL Classification: G01, G11

Suggested Citation

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance, Do Day Traders Rationally Learn About Their Ability? (December 8, 2014). Available at SSRN: https://ssrn.com/abstract=2535636 or http://dx.doi.org/10.2139/ssrn.2535636

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)

Yi-Tsung Lee

Peking University - Guanghua School of Management ( email )

Office 336, Guanghua Building 2
Beijing, Beijing 100871
China
(86-10) 6275 5742 (Phone)
(86-10) 6275 5742 (Fax)

Yu-Jane Liu

Peking University - Guanghua School of Management ( email )

Beijing
China

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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