The Trading Behavior of Individual Investors
Brad Barber and Terrance Odean
Abstract
| Modern financial economics assumes that we behave with extreme rationality but we do not. Furthermore, our deviations from rationality are often systematic. Behavioral finance relaxes the traditional assumptions of financial economics by incorporating these observable, systematic, and very human departures from rationality into standard models of financial markets. This paper highlights two common mistakes investors make; they tend to disproportionately hold onto their losing investments while selling their winners, and they trade excessively. We argue that these systematic biases have their origins in human psychology. The human desire to avoid regret causes investors to sell their winners while holding their losers; the tendency for human beings to be overconfident prompts them to trade excessively. |
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