Extrapolators and Contrarians: Forecast Bias and Individual Investor Stock Trading
65 Pages Posted: 18 Feb 2024
Date Written: June 16, 2024
Abstract
We test whether forecast bias affects individual investors' stock trading by combining bias measures from laboratory experiments with administrative trade-level data. On average, subjects exhibit positive forecast bias (extrapolators), while a large minority exhibit negative bias (contrarians). Forecast bias is positively associated with past excess returns of purchased stocks: Extrapolators (contrarians) purchase past winners (losers). Forecast bias is negatively associated with capital gains of sold stocks. Forecast bias explains investor heterogeneity in the relation between market returns and net flows to stocks. Our study shows that forecast bias links past returns to trading decisions for purchases, sales, and net flows.
Keywords: G5, G11, G41, D84, D81 Extrapolation, Contrarian bias, Forecast bias, Expectations, Household finance, Experimental finance, Individual investors, Individual investor trading
JEL Classification: G5, G11, G41, D84, D81
Suggested Citation: Suggested Citation