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Overtrading

In: The Lottery Mindset: Investors, Gambling and the Stock Market

Author

Listed:
  • Wai Mun Fong

    (National University of Singapore)

Abstract

A standard prescription of modern portfolio theory is that uninformed investors should follow a buy-and-hold investment strategy to minimize the cost of active trading. Individual investors deviate systematically from this prescription. This chapter surveys empirical evidence on the trading behavior of individual investors around the world. An unambiguous finding from the literature is that individual investors trade too much and to their detriment. Losses from trading are amplified due to investors’ preference for lotterytype stocks such as those with high idiosyncratic volatility. Losses of individual investors are gains to institutional investors. Contrary to the predictions of rational learning theories, investors with a history of losses persist in trading actively. Explanations for active trading based on psychology and behavioral finance research are discussed.

Suggested Citation

  • Wai Mun Fong, 2014. "Overtrading," Palgrave Macmillan Books, in: The Lottery Mindset: Investors, Gambling and the Stock Market, chapter 2, pages 25-45, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-38173-6_2
    DOI: 10.1057/9781137381736_2
    as

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