CAREER: Studies of Investor Behavior

University Of California-Davis, Davis CA

Investigators

Abstract

Increasingly, households are investing in common stock-from 1995 to 1998 the number of households investing directly in equities grew by over 30 per cent. At the same time many investors are eschewing professional advice--from 1995 through mid 2000, investors opened 12.5 million online brokerage accounts. The importance of self-directed investing will only grow in future years as more and more households are handed responsibility for their own retirement investments through defined contribution plans and, possibly, through discretionary personal social security accounts. Individual's trading decisions affect not only their own welfare but, through their influence on market prices, the welfare of others. Yet little is known about what motivates the trading decisions of individual investors. The goal of my research is to increase our understanding of individual investors and of their influence on markets. I have obtained from various brokerage houses anonymous trading records for over one million individual investors. With these records, I can document how investors behave in real life investment situations and I can test theories of investor behavior. For example, I can test the hypothesis that investment success leads many investors to become overconfident. Based on the trading records in my databases, I plan to develop a computer simulation of financial markets in which individual investors interact with institutional investors and market-makers. The individual investors in this simulation will follow rules estimated from the databases. This simulation will model how the trading of individual investors changes stock prices and how this process affects investor wealth. I will also run experiments that test whether access to more information leads investors to become overconfident and, as a result, to trade excessively. Finally, I will survey investors to see whether aggressive trading by individual investors is more often the result of unrealistically optimistic beliefs than high tolerance for risk. In addition to increasing academic understanding of individual investors, these studies will provide guidance for investor education efforts.