Information Acquisition and Portfolio Performance
AbstractRational investors perceive correctly the value of financial information. Investment in information is therefore rewarded with a higher Sharpe ratio. Overconfident investors overstate the quality of their own information, and thus attain a lower Sharpe ratio. We contrast the implications of the two models using a unique survey of customers of an Italian leading bank with portfolio data and measures of financial information. We find that the portfolio Sharpe ratio is negatively associated with investment in information. The negative correlation is stronger for men than women and for those who claim they know stocks well, arguably because these investors are more likely to be overconfident. We also show that investment in information is associated with more frequent trading, less delegation of portfolio decisions and less diversified portfolios. In each case, the effect of information is stronger for investors who, a priori, are suspected to be more overconfident.
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Bibliographic InfoPaper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 167.
Date of creation: 01 Oct 2006
Date of revision:
Portfolio Choice; Rationality; Overconfidence; Behavioral Finance;
Other versions of this item:
- Luigi Guiso & Tullio Jappelli, 2007. "Information Acquisition and Portfolio Performance," Economics Working Papers ECO2007/45, European University Institute.
- Guiso, Luigi & Jappelli, Tullio, 2006. "Information Acquisition and Portfolio Performance," CEPR Discussion Papers 5901, C.E.P.R. Discussion Papers.
- Luigi Guiso & Tullio Jappelli, 2006. "Information Acquisition and Portfolio Performance," CeRP Working Papers 52, Center for Research on Pensions and Welfare Policies, Turin (Italy).
- E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- G1 - Financial Economics - - General Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-30 (All new papers)
- NEP-FIN-2006-09-30 (Finance)
- NEP-FMK-2006-09-30 (Financial Markets)
- NEP-MAC-2006-09-30 (Macroeconomics)
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