Blog - Investing Notes
October 30, 2004 –
Implicit Coordination of Individual Investors?
In their April 2003 paper entitled "Systematic Noise", Brad Barber, Terrance
Odean and Ning Zhu investigate the degree to which the trading behaviors
of individual investors are systematic and herd-like. Using samples
of 66,465 investors at a large national discount broker and 665,533
investors at a large retail broker, they find that:
- Within a given month, buying and selling activities
are highly correlated, probably attention-driven, across individual
investors.
- Individual investors are net buyers of stocks with
unusually high trading volumes and very recent extreme negative and
positive returns, perhaps because those stocks catch their attention.
- If individual investors are net buyers of a stock
this month, they are likely to be net buyers of the stock in coming
months.
- Individual investors buy and sell stocks with
strong past returns. When buying, overextrapolation of strong past
returns in individual stocks leads individual investors to buy
the same stocks. When selling, the dominant behavioral factor is avoidance
of the regret associated with sale of a losing investment. Individual
investors therefore sell winners rather than losers.
In summary, individual investors systematically show
attention-driven herd-like behaviors.
See our blog entry of 10/9/04
for an overview of investor herding.
