Do Investors Trade Too Much?
Read the paperopens doi.org in a new tab
What they found
Using the trading records of 10,000 accounts at a large U.S. discount broker from 1987 to 1993, Odean tested whether individual investors trade more than they should. Not only did their trading fail to cover its costs, the stocks they bought went on to underperform the stocks they sold by a meaningful margin over the following year, even before costs. Investors were systematically choosing worse stocks to buy than to sell. Odean attributed this to overconfidence: people who believe their information is better than it is trade more.
What you can use
- The average retail investor's trades lose money even before commissions: what they buy does worse than what they sell.
- Overconfidence, not lack of information, is the leading explanation for excessive trading.
- Before making a trade, ask honestly what you know that the other side does not.
Caveats
Data from one discount broker in the late 1980s and early 1990s; commissions were much higher then. The sample is self-selected active investors, not the whole population.
Tags: retail, overconfidence, trading-frequency, brokerage-data
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.