Overtrading and Investment Performance of Individual Investors

ABSTRACT The trading skill of individual investors is weaker than institutional investors and trading characteristics are significantly different from literature viewpoint and industry experience. Individual investors generally have weaker analysis abilities, limited external support, and face disadvantaged position in information and technology. There is extensive research on institutional investors’ trading behavior, while literature on the trading behavior of individual investors is limited. The relationship between overtrading and performance of individual investors is a novel perspective in performance attribution as investment behavior of individual investors differs from institutional investors. Individual investors' overtrading behavior including the existence, mechanism, and consequences of excessive trading are discussed in this article by studying the trading data of individual customers from a large security firm. I use bootstrap sampling and factor model to test the hypothesis. This article finds that: (1) Overtrading is widespread and lasting after considering transaction costs. Individual investors have significant negative stock selection ability and lack timing ability. (2) Individual investors with different trading frequencies tend to exhibit overtrading after considering transaction costs and overtrading among southerners is more pronounced. Investors with large wealth do not exhibit overtrading, while investors with little wealth exhibit significant overtrading. Overtrading is not significant for investors aged 30 below, 51-60 years old, and 61 years old above. Investors aged 31 to 40 and 41 to 50 experience significant overtrading. Investors with junior high school or below, high school or vocational school, college or undergraduate degrees exhibit overtrading. (3) Overconfidence is the cause of overtrading. Man exhibits overtrading at 1% level. The portfolio is more concentrated, the gambling tendency is greater, the transactions are greater, and the degree of overtrading is more severe. The richer the investment experience, the more beneficial it is to eliminate the impact of overconfidence, and the weaker the degree of overtrading. (4) Overconfidence results in a 2.4% lower annualized return for men. Overtrading in the current month can damage the returns of the following month, and the damage is greater for men.