Extrapolators and Contrarians: Forecast Bias and Individual Investor Stock Trading

65 Pages Posted: 18 Feb 2024

See all articles by Steffen Andersen

Steffen Andersen

Copenhagen Business School - Department of Finance; CEPR

Stephen G. Dimmock

National University of Singapore; Asian Bureau of Finance and Economic Research (ABFER)

Kasper Meisner Nielsen

Copenhagen Business School - Department of Finance

Kim Peijnenburg

Tilburg University; Centre for Economic Policy Research (CEPR); Netspar

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

Andersen, Steffen and Dimmock, Stephen G. and Nielsen, Kasper Meisner and Peijnenburg, Kim, Extrapolators and Contrarians: Forecast Bias and Individual Investor Stock Trading (June 16, 2024). Available at SSRN: https://ssrn.com/abstract=4715158 or http://dx.doi.org/10.2139/ssrn.4715158

Steffen Andersen

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

CEPR ( email )

London
United Kingdom

Stephen G. Dimmock (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
BIZ 1 #7-63
Singapore, 119245
Singapore

Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Kasper Meisner Nielsen

Copenhagen Business School - Department of Finance ( email )

A4.17 Solbjerg Plads 3
Copenhagen, Frederiksberg 2000
Denmark

Kim Peijnenburg

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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