Trading Performance, Disposition Effect, Overconfidence, Representativeness Bias, and Experience of Emerging Market Investors

55 Pages Posted: 16 Jan 2007  

Gong-meng Chen

Hong Kong Polytechnic University - School of Accounting and Finance

Kenneth Kim

SUNY at Buffalo - School of Management

John R. Nofsinger

University of Alaska Anchorage

Oliver M. Rui

China Europe International Business School (CEIBS)

Date Written: January 2007

Abstract

Using brokerage account data from China, we study investment decision making in an emerging market. We find that Chinese investors make poor trading decisions: the stocks they purchase underperform those they sell. We also find that Chinese investors suffer from three behavioral biases: (i) they tend to sell stocks that have appreciated in price, but not those that have depreciated in price, consistent with a disposition effect, acknowledging gains but not losses; (ii) they seem overconfident; and (iii) they appear to believe that past returns are indicative of future returns (a representativeness bias). In comparisons to prior findings, Chinese investors seem more overconfident than U.S. investors (i.e., the Chinese hold fewer stocks, yet trade very often) and their disposition effect appears stronger. Finally, we categorize Chinese investors based on proxy measures of experience and find that "experienced" investors are not always less prone to behavioral biases than are "inexperienced" ones.

Keywords: Disposition effect, Investor behavior, Overconfidence, Representativeness bias

Suggested Citation

Chen, Gong-meng and Kim, Kenneth and Nofsinger, John R. and Rui, Oliver M., Trading Performance, Disposition Effect, Overconfidence, Representativeness Bias, and Experience of Emerging Market Investors (January 2007). Available at SSRN: https://ssrn.com/abstract=957504 or http://dx.doi.org/10.2139/ssrn.957504

Gong-meng Chen (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong
+852 2766 7070 (Phone)

Kenneth A. Kim

SUNY at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

John R. Nofsinger

University of Alaska Anchorage ( email )

3211 Providence Drive
Anchorage, AK 99508
United States

HOME PAGE: http://faculty.cbpp.uaa.alaska.edu/jnofsinger/

Oliver M. Rui

China Europe International Business School (CEIBS) ( email )

699 Hong Feng Road
Pudong
Shanghai 201206
China
86-21-28905618 (Phone)
86-21-28905620 (Fax)

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