The Behavior of Individual Investors

In this study, Professor Brad Barber and co-author Terrance Odean from U.C. Berkeley provide an overview of research on individual investor stock trading behavior. This research documents that individual investors underperform standard benchmarks (e.g., a low cost index fund), sell winning investments while holding losing investments (the “disposition effect”), are heavily influenced by limited attention and past return performance in their purchase decisions, engage in naïve reinforcement learning by repeating past behaviors that coincided with pleasure while avoiding past behaviors that generated pain, and tend to hold undiversified stock portfolios. All of these behaviors hurt an individual investor’s financial well being.