>Doug Henwood wrote:
>
>> Regardless of the social/economic effects, people who day trade on the web
>> will be lucky to break even. There's a lot of nonsense in financial theory,
>> but the near-impossibility of beating the market and the counterproductive
>> nature of excessive trading aren't part of the nonsense.
>>
>
>This is the conventional wisdom, but so far it has not ben borne out by
>empirical data.
Au contraire! For institutions, see:
Lakonishok, Josef, Andrei Shleifer, and Robert W. Vishny (1992). "The Structure and Performance of the Money Management Industry," Brookings Papers on Economic Activity: Microeconomics, pp. 339-392.
For individuals, see:
BOYS WILL BE BOYS: GENDER, OVERCONFIDENCE, AND COMMON STOCK INVESMENT [sic] Theoretical models of financial markets built on the assumption that some investors are overconfident yield one central prediction: overconfident investors will trade too much. We test this prediction by partitioning investors on the basis of a variable that provides a natural proxy for overconfidence - gender. Psychological research has established that men are more prone to overconfidence than women. Thus, models of investor overconfidence predict that men will trade more and perform worse than women. Using account data for over 35,000 households from a large discount brokerage firm, we analyze the common stock investments of men and women from February 1991 through January 1997. Consistent with the predictions of the overconfidence models, we document that men trade 45 percent more than women and earn annual risk-adjusted net returns that are 1.4 percent less than those earned by women. These differences are more pronounced between single men and single women; single men trade 67 percent more than single women and earn annual risk-adjusted net returns that are 2.3 percent less than those earned by single women. <http://www.gsm.ucdavis.edu/~bmbarber/BoysWillBeBoys.pdf>
THE COMMON STOCK INVESTMENT PERFORMANCE OF INDIVIDUAL INVESTORS Using account data for over 60,000 households from a large discount brokerage firm, we analyze the common stock investment performance of individual investors from February 1991 through January 1997. The average household tilts its common stock investment toward high-beta, small, value stocks, and turns over 75 percent of its portfolio annually. On the one hand, the gross returns (before accounting for transaction costs) earned by the average household are unremarkable; the average household earned an annualized geometric mean gross return of 18.7 percent while the value-weighted market index earned 17.9 percent. On the other hand, the net returns earned by the average household lag reasonable benchmarks by economically and statistically significant amounts; the average household earned an annualized geometric mean net return of 16.4 percent. The 20 percent of households that trade most (averaging at least 8.8 percent turnover per month) earned an annualized geometric mean net return of 11.4 percent. We argue that the well-documented tendency for human beings to be overconfident can best explain the high trading levels and the resulting poor performance of individual investors. Our central message is that trading is hazardous to your wealth. <http://www.gsm.ucdavis.edu/~bmbarber/Individual_Investor_Performance_1-99.pdf>