The Trading Behavior of Individual Investors

University Of California-Davis, Davis CA

Investigators

Abstract

While recent studies have found that investors' common stock selling behavior is heavily influenced by their reluctance to accept losses (which has been labeled the disposition effect), little is known about what influences the buying decisions of investors. We speculate that the buying behavior of individual investors is largely determined by that which catches investors' attention. Thus investors, unlike agents in most academic models, treat buying and selling asymmetrically. This study is an empirical test of the proposition that buying is driven by attention. To test whether buying behavior is driven by attention, the research will use four separate proprietary datasets. Combined, these datasets include month-end common stock positions and trading records for over 100,000 households from 1987 to 1999. These data are compiled from three different brokerage firms: a large discount broker, a large retail broker, and a smaller broker that attracts primarily active traders. To test whether buying behavior is driven by attention, the research will analyze three types of information that are likely to catch the attention of the average investor: large price movements, the announcement of quarterly earnings, and news coverage. The research provides a simple prediction: that buying will increase around these information events regardless of the value of the information. Thus, we anticipate increased buying activity following large price increases and decreases, good and bad earnings announcements, and good and bad press coverage. The research fits neatly into a stream of recent studies that analyze the behavior of individual investors. In combination with current and planned studies of investor behavior, this research serves to enhance our understanding of investor behavior and financial markets, improve investor education, and inform policy decisions.