Theoretical models predict that overcon�dent investors trade excessively. We test this prediction by partitioning investors on gender. Psychological research demonstrates that, in areas such as �nance, men are more overcon�dent than women. Thus, theory predicts that men will trade more excessively than women. Using account data for over 35,000 households from a large discount brokerage, we analyze the common stock investments of men and women from February 1991 through January 1997. We document that men trade 45 percent more than women. Trading reduces men’s net returns by 2.65 percentage points a year as opposed to 1.72 percentage points for women. It’s not what a man don’t know that makes him a fool, but what he does know that ain’t so. Josh Billings, nineteenth century American humorist It is dif�cult to reconcile the volume of trading observed in equity markets with the trading needs of rational investors. Rational investors make periodic contributions and withdrawals

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This paper provides one potential explanation for the rise, persistence and eventual fall of internet stock prices. Specifically, we appeal to a model of heterogenous agents with varying degrees of beliefs about asset payoffs who are subject to short sales constraints. In this framework, it is possible that "optimistic" investors overwhelm "pessimistic" ones, leading to prices not reflecting fundamental values about cash flows. Empirical support for this explanation is provided by exploring the behavior of internet stock prices during the period January 1998 to November 2000. In particular, we document four important elements to our story: (i) the high level of internet stock prices given their underlying fundamentals, (ii) responses of stock prices to a shift towards potentially optimistic investors, (iii) empirical results consistent with shorting being at its maximum possible level for internet stocks, and (iv) the eventual fall, or bubble bursting, of intemet stocks being tied to the increase in the number of sellers to the market via expiration of lockup agreements.

Award at the 2005 European Finance Association Meeting, to the retail broker and discount

We document that purchasing ~selling short! stocks with the most ~least! favorable consensus recommendations, in conjunction with daily portfolio rebalancing and a timely response to recommendation changes, yield annual abnormal gross returns greater than four percent. Less frequent portfolio rebalancing or a delay in reacting to recommendation changes diminishes these returns; however, they remain significant for the least favorably rated stocks. We also show that high trading levels are required to capture the excess returns generated by the strategies analyzed, entailing substantial transactions costs and leading to abnormal net returns for these strategies that are not reliably greater than zero. THIS STUDY EXAMINES WHETHER INVESTORS can profit from the publicly available recommendations of security analysts. Academic theory and Wall Street practice are clearly at odds regarding this issue. On the one hand, the semistrong form of market efficiency posits that investors should not be able to trade profitably on the basis of publicly available information, such as analyst

We review extensive evidence about how psychological biases affect investor behavior and prices. Systematic mispricing probably causes substantial resource misallocation. We argue that limited attention and overconfidence cause investor credulity about the strategic incentives of informed market participants. However, individuals as political participants remain subject to the biases and self-interest they exhibit in private settings. Indeed, correcting contemporaneous market pricing errors is probably not government’s relative advantage. Government and private planners should establish rules ex ante to improve choices and efficiency, including disclosure, reporting, advertising, and default-option-setting regulations. Especially

This paper takes a new look at the tradeoff between risk and return in the stock market. We find a significant positive relation between average stock variance and the return on the market. There is, therefore, a tradeoff between risk and return in the stock market, except that risk is measured as total risk, including idiosyncratic risk, rather than only systematic risk. Further, we find that the variance of the market by itself has no forecasting power for the market return. These relations persist after we control for macroeconomic variables known to forecast the stock market. We show that idiosyncratic risk explains most of the variation of average stock risk through time and it is idiosyncratic risk that drives the forecastability of the stock market.

This paper surveys research on computational agent-based models used in finance. It will concentrate on models where the use of computational tools is critical in the process of crafting models which give insights into the importance and dynamics of investor heterogeneity in many financial settings.

Dallas, and the First Annual Texas Finance Festival for discussions and comments helpful to the evolution of the paper. Pattarake Sarajoti provided valuable assistance. Mann acknowledges the support of the Charles Tandy American Enterprise Center. A good portion of this work was completed while Locke was on the staff of the U.S. Commodity Futures Trading Commission. However, the views expressed are the authors ’ only and do not purport to represent the views of the Commodity Futures Trading Commission or its staff. Do Professional Traders Exhibit Loss Realization Aversion? Recent evidence (e.g. Odean, 1998a) describes investor behavior that is at odds with traditional economic theory. These alternative behaviors, such as those consistent with the disposition effect or overconfidence, form the basis for recent "behavioral " explanations for asset returns (e.g. Daniel, Hirshleifer and Subrahmanyam 1998a and 1998b, Odean 1998b, and Shumway, 1998). Notably, the evidence of alternative investor behavior is based largely on retail customer accounts- those of amateur traders. In this paper we examine trades by populations of professional futures traders for evidence of activity best described by the “behavioral finance ” literature. The data provide

We examine changes in the stock trading behavior and investment performance of 1,607 investors who switch from phone based to online trading during the period 1992 to 1995. We document that young men who are active traders with high incomes and a preference for investing in small growth stocks with high market risk are more likely to switch to online trading. We also find that those who switch to online trading experience unusually strong performance prior to going online, beating the market by more than two percent annually. After going online, they trade more actively, more speculatively, and less profitably than before-- lagging the market by more than three percent annually. A rational response to reductions in market frictions (lower trading costs, improved execution speed, and greater ease of access) does not explain these findings. The increase in trading and reduction in performance of online investors can be explained by overconfidence augmented by self-attribution bias, the illusion of knowledge, and the illusion of control.