Wednesday, November 22, 2006

Newswise | Average Investors Shouldn’t be So Confident

Newswise | Average Investors Shouldn’t be So Confident:
"An increase in the stock market’s overall performance, like the one that took place in October, can turn inexperienced investors into trade-happy amateurs, according to Brigham Young University business professors in a study published in The Review of Financial Studies.

“When investors start off in the market, they tend to trade pretty conservatively,” said Steven Thorley, the H. Taylor Peery professor of finance at BYU’s Marriott School of Management. “In periods where the overall stock market performs well, they see a good return on their portfolio and figure they are good at picking stocks, so they start to trade more frequently.”

Thorley and co-researchers Keith Vorkink and Meir Statman tested the proposition that investors trade their stock more frequently after increases in the general market return cause them to have higher confidence in their stock picking abilities. Behavioral economists refer to these beliefs as “investor overconfidence” and “biased self-attribution.” Vorkink is the Richard E. Cook associate professor of finance at the Marriott School, and Statman is the Glenn Klimek professor of finance at the Leavey School of Business at Santa Clara University."

The academic version (working copy) of this paper is available through SSRN.

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