Terrance Odean
description
Transcript of Terrance Odean
Fear and Greed Drive the Stock Market
Terrance OdeanUniversity of California, Berkeley
SKAGEN Funds New Years’s Conference 2011
• What do we know about investor behavior?
• Why does it matter?
– Market prices
– Investor welfare
Investor Biases• Confusion about probability → Underdiversify.• Overconfidence → Trade too much.• Desire to reduce regret → Cling to losers.• Limited attention → Buy attention grabbing
stocks.• Confusion about probability → Chase
performance.
Underdiversification
• Bill Gates vs.• Enron employees
– 62% of Enron employee 401(k) investments were in company stock
Investor Biases• Confusion about probability → Underdiversify.• Overconfidence → Trade too much.• Desire to reduce regret → Cling to losers.• Limited attention → Buy attention grabbing stocks.• Confusion about probability → Chase performance.
When All Traders Are Above Average(i.e., overconfident) Odean, 1998, Journal of Finance
• Trade more.
• Earn less.
• Underdiversify.
• Increase market volatility.
Do Investors Trade Too Much?Odean, 1999, American Economic Review
Excluding Non-Speculative Trades Odean, 1999, American Economic Review
Monthly Turnover and Annual Performance of Individual Investors
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5
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1 (LowTurnover)
2 3 4 5 (HighTurnover)P
erce
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nnua
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etur
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onth
ly T
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ver
Net Return Turnover
Trading is Hazardous to Your WealthBarber and Odean, 2000, Journal of Finance
"Overall, men claim more ability than do women, but this difference emerges most strongly on … masculine task[s].”
Deaux and Ferris (1977)
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All Women All Men SingleWomen
Single Men
Boys will be BoysBarber and Odean, 2001, Quarterly Journal of Economics,
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-2
-1
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AllWomen
All Men SingleWomen
SingleMen
“Own Benchmark” Annual Net Returns Barber and Odean, 2001, Quarterly Journal of Economics
online
Data = Expertise
Learning to be Overconfident(Gervais & Odean, 2001, Review of Financial Studies)
• Self-attribution bias. People take too much credit for their own successes.
Illusion of Control
• Who rolls the dice.
Investor Biases• Confusion about probability → Underdiversify.• Overconfidence → Trade too much.• Desire to reduce regret → Cling to losers.• Limited attention → Buy attention grabbing stocks.• Confusion about probability → Chase performance.
Panel A: Discount Households
0.0
1.0
2.0
jan feb mar april may june july aug sep oct nov dec
PGR
/PLR
Taxable TDAs
Rate at which Gains are Realized Relative to Losses
Source: Barber and Odean, 2003, Journal of Public Economics
Disposition Effect in TaiwanBarber, Lee, Liu, Odean, 2007, European Financial Management
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2
-36
-28
-20
-12 -4
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Lik
elih
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d o
f r
ep
urch
as r
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tive t
o s
tocks s
old
fo
r lo
ss w
ith
zero
su
bseq
uen
t retu
rn
Percent return since sale
Relative Rate at which Investors Repurchase Stocks Previously Sold
Originally Sold for Gain
Orignially Sold for Loss
19Source: Barber, Odean, & Strahilevitz, 2010.
Investor Biases• Confusion about probability → Underdiversify.• Overconfidence → Trade too much.• Desire to reduce regret → Cling to losers.• Limited attention → Buy attention grabbing
stocks.• Confusion about probability → Chase performance.
All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual
and Institutional InvestorsBarber and Odean, Review of Financial Studies, 2008
• Thousands of stocks.• Bounded rationality and processing ability.• Limit search to stocks that catch attention.• Investors buy stocks that catch their attention.
Simulation Volume Sort
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1 2 3 4 5 6 7 8 9 10a 10b
Partitions Sorted on Same Period Trading Volume
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rce
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Imb
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nc
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40
1 2 3 4 5 6 7 8 9 10a 10b
Partitions of Stocks Sorted on Current Day's Abnormal Trading Volume
Perc
ent O
rder
Imba
lanc
e .
Large Discount Brokerage
Large Retail Brokerage
Small Discount Brokerage
Abnormal Volume Sort IndividualsImbalance by # trades
Source: Barber & Odean 2008.
Order Imbalance: Volume Sorts
TAQ & ISSM Data: 1983-2000
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-10.00
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10.00
20.00
Lowest
Abnormal
Volume
Highest
Abnormal
Volume
Abnormal Trading Volume
Bu
y / S
ell
Imb
ala
nc
e
Individual Investors (Number of Trades)
Individual Investors (Value of Trades)
Simulation Return Sort
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-10
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5
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1a 1b 2 3 4 5 6 7 8 9 10a 10b
Partitions Sorted on Previous Period's Return
Pe
rc
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rd
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ba
lan
ce
25
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0
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1a 1b 2 3 4 5 6 7 8 9 10a 10b
Partitions of Stocks Sorted on Previous Day's Return
Perc
ent O
rder
Imba
lanc
e Large DiscountBrokerage
Small DiscountBrokerage
Large Retail Brokerage
Return Sort IndividualsImbalance by # trades
Source: Barber & Odean 2008.
Order Imbalance: Return Sorts
TAQ & ISSM Data: 1983-2000
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0.00
4.00
8.00
12.00
Lowest
Day
Previous
Return
Highest
Day
Previous
Return
Previous Day's Return
Individual (Number of Trades)
Individual (Value of Trades)
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Investor Biases• Confusion about probability → Underdiversify.• Overconfidence → Trade too much.• Desire to reduce regret → Cling to losers.• Limited attention → Buy attention grabbing stocks.• Confusion about probability → Chase
performance.
2 3 3 4 6 7 9 1015
39
05
1015202530354045
10 (W
orst) 9 8 7 6 5 4 3 2
1 (Best
)
Performance Decile
Perc
enta
ge o
f Buy
sMutual Funds: Money Pours into
Last Year’s Winners
Source: Barber, Odean, and Zheng
• What do we know about investor behavior?
• Why does it matter?
– Market prices
– Investor welfare
Do Retail Trades Move Markets? Barber, Odean, & Zhu, Review of Financial Studies 2009
• Purchases and sales of individual investors are highly correlated
• Higher percentage of individual investor buy orders this week → more buy orders next week → higher returns next week → lower returns next month
• Higher percentage of individual investor buy orders this year → lower returns next year → in the subsequent year high idiosyncratic risk stocks bought by
individuals underperform those sold by 13 percentage points.
Monthly Percentage Four-Factor Abnormal Returns for Value-Weighted Portfolios formed on the basis of Weekly Proportion Buyer-Initiated Trades using
Small and Large Trades: February 1983 to December 2000
Barber, Odean, Zhu, 2009, Review of Financial Studies
Monthly Four-Factor Alpha
(%) t-statistic
Panel A: Contemporaneous Returns Proportion
Buyer-Initiated Quintile
Small Trades
Large Trades
Small Trades
Large Trades
1 (Sold) -2.398 -7.398 -9.79 -38.96 2 -1.205 -5.718 -6.57 -29.36 3 -0.422 -1.091 -3.37 -11.73 4 0.413 4.111 4.20 31.91
5 (Bought) 1.786 8.062 10.92 35.87
B-S (5-1) 4.184 15.460 11.99 39.37
Panel B: Subsequent Returns Proportion
Buyer-Initiated Quintile
Small Trades
Large Trades
Small Trades
Large Trades
1 (Sold) -0.637 0.421 -5.16 3.57 2 -0.160 0.797 -1.87 8.06 3 0.161 0.276 1.70 3.53 4 0.427 -0.219 4.81 -2.79
5 (Bought) 0.733 -0.362 5.22 -3.96
B-S (5-1) 1.370 -0.782 6.55 -5.54
Monthly Percentage Abnormal Returns for High Idiosyncratic Risk Stocks for Value-Weighted Portfolios formed on the basis of Annual Proportion Buyer-Initiated Trades
using Small Trades: 1984 to 2001
Barber, Odean, Zhu, 2009, Review of Financial Studies
Just How Much Do Investors Lose from Trade?
Mean Daily ProfitsInstitutions
Millions $NTIndividuals
Million $NTGross Trading Profits
178.0 (178.0)
Gross Market-timing Profits
46.4 (46.4)
Commissions (25.6) (216.9)
Transaction Tax (27.0) (228.4)
Net Profits 171.8 (669.7)
Source: Barber, Lee, Liu, and Odean, Review of Financial Studies, 2009
Economic Significance• Net Annual Individual Trading Losses are 2.2% of GDP.
• Individual Trading Losses Represent a 3.8% reduction in annual portfolio performance.
• Institutional Gains Represent a 1.5% increase in annual portfolio performance.
• 46.2 % of individuals’ gross daily losses are to foreign investors.– $3.5 million US per day
Source: Barber, Lee, Liu, and Odean, Review of Financial Studies, 2009
U.S. vs. Taiwan
• Taiwanese investors trade more actively.
• U.S. investors face more asymmetric information risk.
Do institutional investors have biases?
• Disposition effect • Extrapolating recent past?• Self-attribution bias• Overconfidence
– models– risk and leverage