Lecture%2020%20Investor%20Behavior%20UBGA%20103%202010

Lecture%2020%20Investor%20Behavior%20UBGA%20103%202010 -...

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Unformatted text preview: Lecture 20 Investor Behavior Market Efficiency A market in which prices always fully reflect available information is called efficient. Eugene Fama, Journal of Finance, 1970 "I'd be a bum in the street with a tin cup if the markets were efficient." Warren Buffet, Fortune , 1995 What do we know about investor behavior? Why does it matter? What can investors do? Investor Biases Confusion about probability Underdiversify. Overconfidence Trade too much. Desire to reduce regret Cling to losers. Limited attention Buy attention grabbing stocks. Confusion about probability Chase performance. Home bias Underdiversify. Limited attention Insensitive to bundled fees. Underdiversification Bill Gates vs. Enron employees 62% of Enron employee 401(k) investments were in company stock Underdiversification Bill Gates vs. Enron employees 62% of Enron employee 401(k) investments were in company stock Underdiversification & Company Stock Nearly 1/3 rd of retirement plan assets at large U.S. companies are invested in company stock. (Benartzi, 2001, Journal of Finance ) 62% of Enron employee 401(k) investments were in company stock (Liang & Weisbenner, 2002, NBER Working Paper 9131) Employees who invest 1/4 th of their assets in company stock sacrifice 42% of the stocks market value relative to holding a well-diversified portfolio . (Meulbroek, 2005, The Journal of Law and Economics ) Investor Biases Confusion about probability Underdiversify. Overconfidence Trade too much. Desire to reduce regret Cling to losers. Limited attention Buy attention grabbing stocks. Confusion about probability Chase performance. Home bias Underdiversify. Limited attention Insensitive to bundled fees. When All Traders Are Above Average (i.e., overconfident) Odean, 1998, Journal of Finance Trade more. Earn less. Underdiversify. Increase market volatility. Do Investors Trade Too Much? Odean, 1999, American Economic Review Excluding Non-Speculative Trades Odean, 1999, American Economic Review Monthly Turnover and Annual Performance of Individual Investors 5 10 15 20 25 1 (Low Turnover) 2 3 4 5 (High Turnover) Percent Annual Return Monthly Turnover Net Return Turnover Trading is Hazardous to Your Wealth Barber and Odean, 2000, Journal of Finance Who gains "Overall, men claim more ability than do women, but this difference emerges most strongly on masculine task[s]. Deaux and Ferris (1977) 20 40 60 80 100 All Women All Men Single Women Single Men Boys will be Boys Barber and Odean, 2001, Quarterly Journal of Economics, -3-2-1 All Women All Men Single Women Single Men Own Benchmark Annual Net Returns Barber and Odean, 2001, Quarterly Journal of Economics online Online Investors: Do the Slow Die First?...
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