Online Investors: Do the Slow Die First? Brad Barber and Terrance Odean
Abstract
We examine changes in the stock trading behavior and investment performance of 1,607 investors who switch from phone based to online trading during the period 1991 to 1996. We compare their trading and performance to that of 1,607 investors with similar size accounts who do not trade online. We find that those who switch to online trading experience unusually strong performance prior to going online, beating the market by more than two percent annually. After going online, they trade more actively, more speculatively, and less profitably than before -- lagging the market by more than three percent annually. A rational response to lower trading costs, improved execution speed, greater ease of access, or unusual liquidity needs does not explain these findings. The increase in trading and reduction in performance of online investors can be explained by overconfidence augmented by self-attribution bias, the illusion of knowledge, and the illusion of control.
[paper at <http://www.gsm.ucdavis.edu/~odean/papers/Online/Online.pdf>]