Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors

49 Pages Posted: 2 Jan 2019

See all articles by Klakow Akepanidtaworn

Klakow Akepanidtaworn

University of Chicago Booth School of Business; University of Chicago - Department of Economics

Rick Di Mascio

Inalytics Limited

Alex Imas

Carnegie Mellon University - Department of Social and Decision Sciences

Lawrence Schmidt

MIT Sloan School of Management

Date Written: December 2018

Abstract

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 data set 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 - in terms of both benchmark-adjusted and risk-adjusted returns. We present evidence consistent with limited attention as a key driver of this discrepancy, with investors devoting more attentional resources to buy decisions than sell decisions. When attentional resources are more likely to be equally distributed between prospective purchases and sales, specifically around company earnings announcement days, stocks sold outperform counterfactual strategies similar to buys. We document managers' use of a heuristic that overweights a salient attribute of portfolio assets - past returns - when selling, whereas we do not observe similar heuristic use for buys. Assets with extreme returns are more than 50% more likely to be sold than those that just under- or over-performed. Finally, we document that the use of the heuristic appears to a mistake and is linked empirically with substantial overall underperformance in selling.

Keywords: behavioral finance; limited attention; heuristics; performance evaluation

JEL Classification: G02, G11, G23

Suggested Citation

Akepanidtaworn, Klakow and Di Mascio, Rick and Imas, Alex and Schmidt, Lawrence, Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors (December 2018). Available at SSRN: https://ssrn.com/abstract=3301277 or http://dx.doi.org/10.2139/ssrn.3301277

Klakow Akepanidtaworn

University of Chicago Booth School of Business ( email )

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Rick Di Mascio

Inalytics Limited ( email )

Croydon
United Kingdom

Alex Imas

Carnegie Mellon University - Department of Social and Decision Sciences ( email )

Pittsburgh, PA 15213-3890
United States

Lawrence Schmidt (Contact Author)

MIT Sloan School of Management ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States

HOME PAGE: http://https://sites.google.com/site/lawrencedwschmidt/home

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