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Can institutional investors always beat individual investors?

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  • Yang, Yaqing
  • Kang, Junqing
  • Lou, Youcheng

Abstract

In an imperfectly competitive market, we find that an institutional investor with an information advantage consistently earns higher expected trading profits than sophisticated individual investors who internalize their price impact. However, when noise-trading volume and the noise-to-signal ratio are sufficiently high, the institutional investor underperforms naive individual investors who act as price-takers. The aggressive trading behavior of naive investors, driven by their failure to account for price impact, forces the institutional investor to reduce his trading aggressiveness. Our findings highlight that, under certain conditions, the irrationality of naive traders can erode the advantages of information-driven trading strategies.

Suggested Citation

  • Yang, Yaqing & Kang, Junqing & Lou, Youcheng, 2026. "Can institutional investors always beat individual investors?," Journal of Financial Markets, Elsevier, vol. 77(C).
    • Handle: RePEc:eee:finmar:v:77:y:2026:i:c:s1386418125000588
    DOI: 10.1016/j.finmar.2025.101018
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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