Familiarity Breeds Day Trade

Abstract

We document the existence of familiarity bias in day-trading, a popular trading activity among individuals that lasts hours at most. Living in a small city close to a firm's local store more than doubles the likelihood of an individual picking its stock to day-trade. The belief of superior information, a common explanation for the well-known familiarity bias in portfolio holdings, is unlikely to explain the familiarity bias in day trade that we unveil: a single local retail store in a small city could give useful information for day-trading only in truly abnormal events. Our finding suggests a simple mechanism under the familiarity bias: top-of-mind dominance.

Keywords: retail investors decisions, familiarity bias, top-of-mind dominance, day trade

JEL Classification: G11, G41, R11