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Trading on Advice

Author

Listed:
  • 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.

Suggested Citation

  • Hackethal, Andreas & Inderst, Roman & Meyer, Steffen, 2010. "Trading on Advice," CEPR Discussion Papers 8091, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8091
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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.
    2. 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.
    3. Calcagno, Riccardo & Monticone, Chiara, 2015. "Financial literacy and the demand for financial advice," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 363-380.
    4. Calcagno, Riccardo & Giofré, Maela & Urzì-Brancati, Maria Cesira, 2017. "To trust is good, but to control is better: How investors discipline financial advisors’ activity," Journal of Economic Behavior & Organization, Elsevier, vol. 140(C), pages 287-316.
    5. repec:eee:hapoch:v1_661 is not listed on IDEAS
    6. Sprenger, Julia, 2016. "Financial literacy: A barrier to seek financial advice but not a shield against following it," Ruhr Economic Papers 634, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.

    More about this item

    Keywords

    financial advice; trading;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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