Just How Much Do Individual Investors Lose By Trading?
Brad M. Barber
University of California, Davis
Peking University - Guanghua School of Management
National Chengchi University (NCCU) - Department of Finance and Banking
University of California, Berkeley - Haas School of Business
AFA 2006 Boston Meetings Paper
EFA 2005 Moscow Meetings Paper
We document that individual investor trading results in systematic and, more importantly, economically large losses. Using a complete trading history of all investors in Taiwan, we document that the aggregate portfolio of individual investors suffers an annual performance penalty of 3.8 percentage points. Individual investor losses are equivalent to 2.2 percent of Taiwan's GDP or 2.8 percent of total personal income - nearly as much as the total private expenditure on clothing and footwear in Taiwan. Using orders underlying trade, we document that virtually all of individual trading losses can be traced to their aggressive orders; passive orders placed by individuals are profitable at short horizons and suffer modest losses at longer horizons. In contrast, institutions enjoy an annual performance boost of 1.5 percentage points (after commissions and taxes, but before other costs) and both the aggressive and passive trades of institutions are profitable. Foreign institutional investors garner nearly half of the institutional profits. Finally, the introduction of a legal lottery in Taiwan in 2002 coincided with a 25 percent reduction in turnover on the Taiwan Stock Exchange.
Number of Pages in PDF File: 30
Keywords: market efficiency, individual investors, institutional investors, information asymmetry
JEL Classification: G12, G14
Date posted: September 2, 2005