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Sensation Seeking, Overconfidence, and Trading Activity

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  • MARK GRINBLATT
  • MATTI KELOHARJU

Abstract

This study analyzes the role that two psychological attributes-sensation seeking and overconfidence-play in the tendency of investors to trade stocks. Equity trading data from Finland are combined with data from investor tax filings, driving records, and mandatory psychological profiles. We use these data, obtained from a large population, to construct measures of overconfidence and sensation seeking tendencies. Controlling for a host of variables, including wealth, income, age, number of stocks owned, marital status, and occupation, we find that overconfident investors and those investors most prone to sensation seeking trade more frequently. Copyright (c) 2009 the American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 64 (2009)
Issue (Month): 2 (04)
Pages: 549-578

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Handle: RePEc:bla:jfinan:v:64:y:2009:i:2:p:549-578

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  1. Grinblatt, Mark & Han, Bing, 2005. "Prospect theory, mental accounting, and momentum," Journal of Financial Economics, Elsevier, vol. 78(2), pages 311-339, November.
  2. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  3. Biais, Bruno & Hilton, Denis & Mazurier, Karine & Pouget, Sébastien, 2004. "Judgmental Overconfidence, Self-Monitoring and Trading Performance in an Experimental Financial Market," IDEI Working Papers 259, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Simon Gervais & Terrance Odean, . "Learning To Be Overconfident," Rodney L. White Center for Financial Research Working Papers 5-97, Wharton School Rodney L. White Center for Financial Research.
  5. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, 04.
  6. John R. Graham & Campbell R. Harvey & Hai Huang, 2005. "Investor Competence, Trading Frequency, and Home Bias," NBER Working Papers 11426, National Bureau of Economic Research, Inc.
  7. Richard Deaves & Erik Lüders & Guo Ying Luo, 2005. "An Experimental Test of the Impact of Overconfidence and Gender on Trading Activity," CoFE Discussion Paper 05-07, Center of Finance and Econometrics, University of Konstanz.
  8. Grinblatt, Mark & Keloharju, Matti, 2000. "The investment behavior and performance of various investor types: a study of Finland's unique data set," Journal of Financial Economics, Elsevier, vol. 55(1), pages 43-67, January.
  9. Mark Grinblatt, 2001. "What Makes Investors Trade?," Journal of Finance, American Finance Association, vol. 56(2), pages 589-616, 04.
  10. Paul Milgrom & Nancy L.Stokey, 1979. "Information, Trade, and Common Knowledge," Discussion Papers 377R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. Laurence Weiss, 1979. "Information Aggregation and Policy," Cowles Foundation Discussion Papers 528, Cowles Foundation for Research in Economics, Yale University.
  12. Julie Agnew & Pierluigi Balduzzi & Annika Sundén, 2003. "Portfolio Choice and Trading in a Large 401(k) Plan," American Economic Review, American Economic Association, vol. 93(1), pages 193-215, March.
  13. Brad M. Barber & Terrance Odean, 2002. "Online Investors: Do the Slow Die First?," Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 455-488, March.
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