Is online trading gambling with peanuts?

Anderson, Anders

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URL:	https://ub-madoc.bib.uni-mannheim.de/2604
URN:	urn:nbn:de:bsz:180-madoc-26049
Document Type:	Working paper
Year of publication:	2006
The title of a journal, publication series:	Working paper series / Sonderforschungsbereich 504, Rationalitätskonzepte, Entscheidungsverhalten und Ökonomische Modellierung
Volume:	06-02
Place of publication:	Mannheim
Publication language:	English
Institution:	School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series:	Sonderforschungsbereich 504 > Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung (Laufzeit 1997 - 2008)
Subject:	330 Economics
Classification:	JEL: G11 D14 C24 ,
Subject headings (SWD):	Anlageverhalten , Wertpapierhandel , Börseninformationssystem , Portfoliomanagement , Schätzung , Internet
Keywords (English):	Investor behavior , performance evaluation , online trading , overconfidence
Abstract:	If individuals derive a small utility from gambling, we should observe high turnover in portfolios that are of only marginal importance to them. By the use of detailed individual financial data, as well as trades from a Swedish online broker, I measure the frequency and cost of online trading in the cross-section, and find the opposite relation. Those who have online portfolios that constitute a large share of risky assets trade more aggressively, but have lower trading performance. These results can be explained by a simple Treynor-Black portfolio model where investors suffer from biased self-assessment, rather than possessing true investment skill. The overall result suggests that the cost of online trading can be substantial. The top quintile of investors who have the highest share of their total financial assets in stocks invested at the brokerage firm under study loose 3.70% of their financial wealth annually, which corresponds to 1.38% of aggregate income within this group. These investors do not only hve lower overall wealth and income, but also have the highest aggregate trading losses. Therefore, trading losses are mainly carried by those who can afford them the least. Across individuals, annual losses for 36% of investors exceed 1% of their financial wealth, and 17% lose more than 5%.
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