126-JustHowMuchDoIndividualInvestorsLose_RFS_2009 - Just...

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Just How Much Do Individual Investors Lose by Trading? Brad M. Barber Graduate School of Management, University of California Yi-Tsung Lee National Chengchi University Yu-Jane Liu Guanghua School, Peking University and National Chengchi University Terrance Odean Haas School of Business, University of California Individual investor trading results in systematic and economically large losses. Using a complete trading history of all investors in Taiwan, we document that the aggregate portfolio of individuals suffers an annual performance penalty of 3.8 percentage points. In- dividual investor losses are equivalent to 2.2% of Taiwan’s gross domestic product or 2.8% of the total personal income. Virtually all individual trading losses can be traced to their aggressive orders. In contrast, institutions enjoy an annual performance boost of 1.5 per- centage points, and both the aggressive and passive trades of institutions are proFtable. ±oreign institutions garner nearly half of institutional proFts. ( JEL G11, G14, G15, H31) ±inancial advisers recommend that individual investors refrain from frequent trading. Investors should buy and hold diversiFed portfolios, such as low-cost mutual funds. If skill contributes to investment returns, individual investors are obviously at a disadvantage when trading against professionals. What is less clear is just how much do individual investors lose by trading? In this paper, we document that trading in Fnancial markets leads to economically large losses for individual investors and virtually all of the losses of individual investors We are grateful to the Taiwan Stock Exchange for providing the data used in this study. Michael Bowers provided excellent computing support. Barber appreciates the National Science Council of Taiwan for underwriting a visit to Taipei, where Timothy Lin (Yuanta Core PaciFc Securities) and Keh Hsiao Lin (Taiwan Securities) organized excellent overviews of their trading operations. We appreciate the comments of Ken ±rench, Charles Jones, Owen Lamont, Mark Kritzberg, Victor W. Liu, and seminar participants at UC Berkeley School of Law, UC-Davis, University of Illinois, the Indian School of Business, National Chengchi University, University of North Carolina, University of Texas, Yale University, the Wharton 2004 Household ±inance Conference, American ±inance Association 2006 Boston Meetings, the Taiwan ±inancial Supervisory Commission, and the 12th Conference on the Theory and Practice of Securities and ±inancial Markets (Taiwan). Terrance Odean is grateful for the Fnancial support of the National Science ±oundation (grant no. 0222107). Yu-Jane Liu gratefully acknowledges the Fnancial support from National Natural Science ±oundation of China (grant no. 70432002). Address correspondence to Terrance Odean, Haas School of Business, University of California, Berkeley, CA 94720; telephone: 510-642-6767; e-mail: odean@haas.berkeley.edu and faculty.haas.berkeley.edu/odean.
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This note was uploaded on 02/08/2012 for the course FIN FIN4345 taught by Professor Koij during the Spring '10 term at FIU.

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126-JustHowMuchDoIndividualInvestorsLose_RFS_2009 - Just...

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