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Trading on Advice

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Author Info

  • Hackethal, Andreas
  • Inderst, Roman
  • Meyer, Steffen

Abstract

Why do people trade? Because they are told to! Using a unique dataset from a large German bank, we find that retail investors who report that they rely heavily on their advisors’ recommendations have a substantially higher trading volume and purchase a higher fraction of investment products for which their advisors were incentivized (“promotion products”). As we have access to administrative data on the bank’s revenues from security transactions, we can show that, altogether, customers who rely strongly on advice generate more than twenty percent higher revenues. We further support our picture of “advice-driven” trading activity by using survey evidence on the initiative and frequency of contacts between advisors and investors. Confirming the predictions of our formal model, investors rely more on advice when they perceive less of a conflict of interest and when they have a lower opinion of their own and a higher opinion of their advisors’ expertise. Given that advice is ubiquitous in retail financial services, our theoretical and empirical findings should be applicable more broadly.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8091.

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Date of creation: Nov 2010
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Handle: RePEc:cpr:ceprdp:8091

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Keywords: financial advice; trading;

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References

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Cited by:
  1. Menkhoff, Lukas & Schmeling, Maik & Schmidt, Ulrich, 2013. "Overconfidence, experience, and professionalism: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 86(C), pages 92-101.
  2. Inderst, Roman & Ottaviani, Marco, 2012. "How (not) to pay for advice: A framework for consumer financial protection," Journal of Financial Economics, Elsevier, vol. 105(2), pages 393-411.

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