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Why Do (Some) Households Trade So Much?

Review of Financial Studies, Forthcoming

AFA 2008 New Orleans Meetings Paper

57 Pages Posted: 20 Mar 2007 Last revised: 18 Dec 2010

Juhani T. Linnainmaa

USC Marshall School of Business; National Bureau of Economic Research (NBER)

Date Written: December 11, 2010

Abstract

When agents can learn about their abilities as active investors, they rationally "trade to learn" even if they expect to lose from active investing. The model used to develop this insight draws conclusions that are consistent with empirical study of household trading behavior: Households' portfolios underperform passive investments; their trading intensity depends on past performance; and they begin by trading small sums of money. Using household data from Finland, the paper estimates a structural model of learning and trading. The estimated model shows that investors trade to learn even if they are pessimistic about their abilities as traders. It also demonstrates that realized returns are significantly downward-biased measures of investors' true abilities.

Keywords: Learning, individual investor behavior, individual investor performance, reverse survivorship bias

JEL Classification: D10, G11

Suggested Citation

Linnainmaa, Juhani T., Why Do (Some) Households Trade So Much? (December 11, 2010). Review of Financial Studies, Forthcoming; AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=972807

Juhani Linnainmaa (Contact Author)

USC Marshall School of Business ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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