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Behavioral Gaps Between Hypothetical Investment Returns and Actual Investor Returns

In: Finance and the Behavioral Prospect

Author

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  • James Ming Chen

    (Michigan State University)

Abstract

Individual investors behave badly. “[I]nvestors with strong behavioral biases or lack of attention” to meaningful financial news are more likely to forgo equity ownership or to participate in capital markets “for the wrong reasons.”1 Individual investors, often the product of that lethal combination of ignorance and bias, “trade … frequently, tend to time their buys and sells badly, and prefer high expense [mutual] funds and active funds rather than index funds.”2 Behavioral biases cost investors. Narrow framing extracts a 2.16 % premium from the most heavily affected quintile of individual investors relative to the least affected quintile.3 The disposition effect costs the worst quintile 0.89 % in annual returns relative to best quintile.4

Suggested Citation

  • James Ming Chen, 2016. "Behavioral Gaps Between Hypothetical Investment Returns and Actual Investor Returns," Quantitative Perspectives on Behavioral Economics and Finance, in: Finance and the Behavioral Prospect, chapter 0, pages 283-299, Palgrave Macmillan.
    • Handle: RePEc:pal:qpochp:978-3-319-32711-2_11
    DOI: 10.1007/978-3-319-32711-2_11
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