By MARK FRYER
Are real-life investors really as irrational as some economists claim?
Evidence from the United States suggests they are. And the more effort they devote to following the markets, the more they tend to be their own worst enemies.
University of California professor Terrance Odean has spent years unravelling the mysteries
of investor behaviour by studying vast numbers of share-trading records - one of his studies used records of almost 2 million share trades by 78,000 households over five years.
Among his findings: investors trade too often, they sell winners and hang on to losers and they overestimate their ability.
In one study, he looked at 1600 investors who took to buying and selling shares online. Before going online, those investors had, on average, outperformed the overall sharemarket by more than 2 per cent a year.
After going online, they made many more trades - and underperformed the market by about 3 per cent a year.
That's not surprising, given that in other studies Odean found a direct relationship between the number of share trades a household makes and the performance of its share portfolio - more trades equals less performance.
He says the explanations include overconfidence, "self-attribution bias" (our tendency to attribute successes to our own abilities, while failures are just bad luck), the "illusion of knowledge" (the more information we absorb, the more confident we become about making the right decisions) and the "illusion of control" (behaving as though our own personal involvement can influence chance events).
His studies are also bad news for any men who control the pursestrings; he found that men make one and a half times as many share trades as women and earn lower returns.
Single men are particularly avid traders, and particularly poor performers.
"Investors are led to believe that profitable investment opportunities are ephemeral events, seized only by the quick and vigilant," says Odean. "Most investors, however, will benefit from a slow trading, buy-and-hold strategy. Trigger-happy traders are prone to shooting themselves in the foot."
