Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors
51 Pages Posted: 2 Jan 2019 Last revised: 12 Apr 2019
Date Written: April 1, 2019
Most research on heuristics and biases in financial decision-making has focused on non-experts, such as retail investors who hold modest portfolios. We use a unique dataset that includes daily holdings and trades to show that financial market experts---institutional investors with portfolios averaging $573 million---exhibit costly, systematic biases. A striking finding emerges: while investors display clear skill in buying, their selling decisions underperform substantially---even relative to strategies involving no skill such as randomly selling existing positions. Across many specifications, foregone profits relative to a random-sell strategy are of similar magnitude as the gains accrued from buying. We present evidence that an asymmetric allocation of cognitive resources towards buying relative to selling can explain this discrepancy. We first exploit events when attention is more likely to be evenly split between prospective buying and selling decisions---earning announcement days---and find that stocks bought and sold both outperform counterfactual strategies. This suggests traders do not lack a fundamental skill in selling. We then show that a heuristic process associated with limited attention and cognitive constraints can explain selling but not buying decisions. Assets with salient features in the form of extreme past returns are 50 percent more likely to be sold than those with zero benchmark-adjusted returns. Past returns have little predictive power for buying decisions. Lastly, the use of the documented heuristics are costly; selling decisions that are associated with the highest heuristic use underperform the most.
Keywords: behavioral finance; limited attention; heuristics; performance evaluation
JEL Classification: G02, G11, G23
Suggested Citation: Suggested Citation