Smoking Hot Portfolios? Overtrading from Self-Control Failure

57 Pages Posted: 6 Mar 2019 Last revised: 7 Oct 2019

See all articles by Charline Uhr

Charline Uhr

Goethe University Frankfurt

Steffen Meyer

University of Southern Denmark - Department of Business and Economics; Danish Finance Institute

Andreas Hackethal

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE

Date Written: September 2019

Abstract

Psychology considers self-control failure, i.e., the inability to resist certain behaviors and impulses when seeking to achieve future goals as a major human pathology. The finance literature models and applies self-control failure to explain time-inconsistent behavior such as under-saving and non-participation decisions as a result of present bias due to hyperbolic discounting. However, literature does not investigate whether and to what extent self-control failure affects investment behavior among those who have positive savings and stockholdings. We fill this gap by identifying smoking as the most socially accepted example of present-biased preferences and link it to trading records. We compare trading behavior in the investment portfolio between 3,553 smokers and 10,091 nonsmokers over six years and show that the proportion and demographic characteristics of smokers are consistent with German survey data and federal statistics. Smoking as a proxy for self-control failure is associated with a higher number of trades per month, higher trading volume, and higher portfolio turnover and not explained by other biases such as overconfidence, social contagion, sensation seeking, or attention grabbing. But we find that self-control failure exacerbates these other biases. We show that self-control failure is costly because it increases the gap between the gross and net returns of smokers relative to nonsmokers.

Keywords: self-control; individual investor; trading behavior

JEL Classification: G41; D14, G21; G11

Suggested Citation

Uhr, Charline and Meyer, Steffen and Hackethal, Andreas, Smoking Hot Portfolios? Overtrading from Self-Control Failure (September 2019). SAFE Working Paper No. 245. Available at SSRN: https://ssrn.com/abstract=3347625 or http://dx.doi.org/10.2139/ssrn.3347625

Charline Uhr (Contact Author)

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz
Frankfurt am Main, 60323
Germany

Steffen Meyer

University of Southern Denmark - Department of Business and Economics ( email )

DK-5230 Odense
Denmark

Danish Finance Institute ( email )

Andreas Hackethal

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno Platz 3
Frankfurt am Main, 60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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