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Information Acquisition and Portfolio Performance

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Listed:
  • Luigi Guiso
  • Tullio Jappelli

Abstract

Rational investors perceive correctly the value of financial information. Investment in information is therefore rewarded with a higher Sharpe ratio. Overcon.dent 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 overcon.dent. 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.

Suggested Citation

  • Luigi Guiso & Tullio Jappelli, 2007. "Information Acquisition and Portfolio Performance," Economics Working Papers ECO2007/45, European University Institute.
  • Handle: RePEc:eui:euiwps:eco2007/45
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    References listed on IDEAS

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    11. Ivković, Zoran & Sialm, Clemens & Weisbenner, Scott, 2008. "Portfolio Concentration and the Performance of Individual Investors," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(03), pages 613-655, September.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Counterproductive knowledge
      by chris dillow in Stumbling and Mumbling on 2007-11-21 17:41:55

    Citations

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    Cited by:

    1. Hackethal, Andreas & Haliassos, Michael & Jappelli, Tullio, 2012. "Financial advisors: A case of babysitters?," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 509-524.
    2. Raffaele Miniaci & Sergio Pastorello, 2010. "Mean-variance econometric analysis of household portfolios," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(3), pages 481-504.
    3. Fernando Alvarez & Luigi Guiso & Francesco Lippi, 2012. "Durable Consumption and Asset Management with Transaction and Observation Costs," American Economic Review, American Economic Association, vol. 102(5), pages 2272-2300, August.
    4. Elena Argentesi & Helmut Lütkepohl & Massimo Motta, 2010. "Acquisition of Information and Share Prices: An Empirical Investigation of Cognitive Dissonance," German Economic Review, Verein für Socialpolitik, vol. 11, pages 381-396, August.
    5. Luigi Guiso & Monica Paiella, 2008. "Risk Aversion, Wealth, and Background Risk," Journal of the European Economic Association, MIT Press, vol. 6(6), pages 1109-1150, December.
    6. Stijn Van Nieuwerburgh & Laura Veldkamp, 2010. "Information Acquisition and Under-Diversification," Review of Economic Studies, Oxford University Press, vol. 77(2), pages 779-805.
    7. repec:pal:compes:v:60:y:2018:i:1:d:10.1057_s41294-018-0053-9 is not listed on IDEAS
    8. Yosef Bonaparte & Russell Cooper, 2010. "Rationalizing Trading Frequency and Returns," Economics Working Papers ECO2010/25, European University Institute.
    9. Abreu, Margarida & Mendes, Victor, 2012. "Information, overconfidence and trading: Do the sources of information matter?," Journal of Economic Psychology, Elsevier, vol. 33(4), pages 868-881.
    10. Kramer, Marc M., 2016. "Financial literacy, confidence and financial advice seeking," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PA), pages 198-217.
    11. repec:eee:joreco:v:30:y:2016:i:c:p:131-139 is not listed on IDEAS
    12. repec:oup:revfin:v:21:y:2017:i:2:p:871-910. is not listed on IDEAS
    13. Attilio Gardini & Alessandro Magi, 2007. "Stock Market Participation: New Empirical Evidence from Italian Households'Behavior," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 66(1), pages 93-114, March.
    14. Daniel Hoechle & Stefan Ruenzi & Nic Schaub & Markus Schmid, 2017. "The Impact of Financial Advice on Trade Performance and Behavioral Biases," Review of Finance, European Finance Association, vol. 21(2), pages 871-910.
    15. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, Elsevier.
    16. Meyer, Steffen & Urban, Linda & Ahlswede, Sophie, 2015. "Does a personalized feedback on investment success mitigate investment mistakes of private investors? Answers from large natural field experiment," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112988, Verein für Socialpolitik / German Economic Association.
    17. Paulina Granados Zambrano, 2012. "I Prefer Not to Know! Analyzing the Decision of Getting Information about your Ability," Economics Working Papers ECO2012/04, European University Institute.

    More about this item

    Keywords

    Portfolio Choice; Rationality; Overconfidence; Behavioral Finance;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets

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