Does Market Selection Eliminate Unskilled Investors? Evidence from Chinese Brokerage Account Records

Abstract

We use Chinese brokerage account records to study whether market selection eliminates unskilled investors. It does not. Most months, the average cumulative returns since commencing trading of the investors who exit the market exceed those of the investors who stay. The relation between exit and cumulative returns is an inverted V with a peak at zero. Most investors experience negative cumulative returns, placing them in the positively-sloped region of the inverted V, which explains the failure of market selection. The relation between exit and cumulative returns is consistent with a disposition effect operating over investors’ entire trading histories.

Keywords: Market selection, market selection hypothesis, disposition effect, gambling, cumulative prospect theory.

JEL Classification: G10, G11, G14, G40, G41