Investor Competence, Trading Frequency, and Home Bias

33 Pages Posted: 18 Nov 2004  

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Hai Huang

Duke University - Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 2006

Abstract

People are more willing to bet on their own judgments when they feel skillful or knowledgeable (Heath and Tversky, 1991). We investigate whether this 'competence effect' influences trading frequency and home bias. We find that investors who feel competent trade more often and have more internationally diversified portfolios. We also find that male investors, and investors with larger portfolios or more education, are more likely to perceive themselves as competent than are female investors, and investors with smaller portfolios or less education. Our paper also contributes to understanding the theoretical link between overconfidence and trading frequency. Existing theories on trading frequency have focused on one aspect of overconfidence, i.e., miscalibration. Our paper offers a potential mechanism for the 'better-than-average' aspect of overconfidence to influence trading frequency. In the context of our paper, overconfident investors tend to perceive themselves to be more competent, and thus are more willing to act on their beliefs, leading to higher trading frequency.

Keywords: Behavioral Finance, Investment, Competence, Ambiguity, Stock Trading Frequency, Home Bias

JEL Classification: G11, G15, F30, G12

Suggested Citation

Graham, John R. and Harvey, Campbell R. and Huang, Hai, Investor Competence, Trading Frequency, and Home Bias (May 2006). AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=620801 or http://dx.doi.org/10.2139/ssrn.620801

John Robert Graham

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Hai Huang

Duke University - Finance ( email )

Durham, NC 27708-0120
United States

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