1
Q
Overconfidence model
A
Investors will trade to their detriment
Higher trade inv have lower utility
2
Q
Rational exp framework
A
MB > MC
Same utility for both investors (high/low trading)
3
Q
Diffr gross net performance
A
No difference for gross. Only for net performance. ( performance is negative. Below benchmarks)
Net controls for transaction cost and commissions.
4
Q
Main msg
A
More trading leads to underperformance when controlling for cost (net returns)
5
Q
Why do people trate so much?
A
Overconfident
6
Q
Other rational explanations for high trading
A
- liquidity
- rebalancing -> cheaper ways
- tax: (1) cant explain 75% turnover (2) we find active trading in both tax and tax deferred accounts (3) trading more consistent with DE
- gambling. (1) risk-seeking= u would increase variance by underdiversifying however Excessive trading leads to decreasing returns without adjusting variance
(2) entertainment = wrong, u would expect turnover and underperformance to decline as the accounts researched represent large portion of household total wealth
7
Q
Does everyone beat the market
A
No 25% does and 25% underperforms. Basis points!
8
Q
How is high trading related to overconfidence
A
Overestimate private info - high trading - below average returns
