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The Behavior of Individual Investors

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  • Barber, Brad M.
  • Odean, Terrance

Abstract

We provide an overview of research on the stock trading behavior of individual investors. This research documents that individual investors (1) underperform standard benchmarks (e.g. a low-cost index fund), (2) sell winning investments while holding losing investments (the “disposition effect†), (3) are heavily influenced by limited attention and past return performance in their purchase decisions, (4) engage in naïve reinforcement learning by repeating past behaviors that coincided with pleasure while avoiding past behaviors that generated pain, and (5) tend to hold undiversified stock portfolios. These behaviors deleteriously affect the financial well being of individual investors.

Suggested Citation

  • Barber, Brad M. & Odean, Terrance, 2013. "The Behavior of Individual Investors," Handbook of the Economics of Finance, Elsevier.
  • Handle: RePEc:eee:finchp:2-b-1533-1570
    DOI: 10.1016/B978-0-44-459406-8.00022-6
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    More about this item

    Keywords

    Individual investors; Trading; Overconfidence; Disposition effect; Attention; diversification;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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