Terrance Odean

University of California, Berkeley | UCB · Haas School of Business

We placed 85,000 retail trades in six retail brokerage accounts from December 2021 to June 2022 to validate the Boehmer et al. algorithm, which uses subpenny trade prices to identify and sign retail trades. The algorithm identifies 35% of our trades as retail, incorrectly signs 28% of identified trades, and yields uninformative order imbalance meas...

The paper shows that mutual funds' trading experiences bias their future repurchasing decisions. Mutual funds are less likely to repurchase a stock if they previously sold the stock for a loss rather than for a gain. After switching to managing a different fund, fund managers still avoid repurchasing stocks they sold for a loss at a past fund. We d...

Retail order imbalance positively predicts returns, but on average retail investor trades lose money. Why? Order imbalance tests equal-weighted stocks, but retail purchases concentrate on attention-grabbing stocks that subsequently underperform. Long–short strategies based on extreme quintiles of retail order imbalance earn dismal annualized return...

We study the influence of financial innovation by fintech brokerages on individual investors’ trading and stock prices. Using data from Robinhood, we find that Robinhood investors engage in more attention‐induced trading than other retail investors. For example, Robinhood outages disproportionately reduce trading in high‐attention stocks. While thi...

Rational models claim “trading to learn” explains widespread excessive speculative trading and challenge behavioral explanations of excessive trading. We argue rational learning models do not explain speculative trading by studying day traders in Taiwan. Consistent with previous studies of learning, unprofitable day traders are more likely than pro...

“STEM parents” refers to parents who work in a science, technology, engineering, or mathematics field. Using survey data from CFA Institute members, we show that parental careers differentially affect the future career choices of girls and boys. Among CFA Institute members, women are more likely to have a STEM parent (particularly a STEM mother) th...

When assessing a fund manager’s skill, sophisticated investors will consider all factors (priced and unpriced) that explain cross-sectional variation in fund performance. We investigate which factors investors attend to by analyzing mutual fund flows as a function of recent returns decomposed into alpha and factor-related returns. Surprisingly, inv...

Can the freedom to choose how retirement funds are invested leave workers worse off? Via simulation, we document that choice in stock v. bond allocation and type of equity investments in private accounts leads to lower utility and greater risk of income shortfalls relative to private accounts without choice. We also compare private account outcomes...

Anecdotal and indirect empirical evidence suggest that excitement and market bubbles are intertwined, such that excitement not only arises during bubbles but may also help fuel them. We directly test the impact of excitement on bubbles in a bubbleprone experimental asset-pricing market (Capinalp, Porter, and Smith, 2001). Prior to trading, particip...

Abstract We use a simple capital budgeting problem to contrast the decisions of overconfident, optimistic managers with those of rational managers. We reach the surprising conclusion that managerial overconfidence and optimism can increase the value of the firm. Risk-averse rational managers will postpone the decision to exercise real options longe...

When selecting an actively managed equity fund, investors seek to identify fund managers who are able to generate positive risk-adjusted performance (alpha). To assess risk-adjusted performance, investors must apply a model of risk when ranking funds; thus, we can infer the risk model that investors use by the fund choices that they make. Based on...

We analyze the performance of and learning by individual investors who engage in day trading in Taiwan from 1992 to 2006 and test the proposition that individual investors rationally speculate as day traders in order to learn whether they possess the superior trading ability. Consistent with models of both rational and biased learning, we document...

Can the freedom to choose how retirement funds are invested leave workers worse off? We analyze social risks of allowing choice, using the Social Security system as an example. Comparing a privatized alternative with the current system via simulation, we document that choice in both equity allocation and equity composition lead to increased income...

Can the freedom to choose how retirement funds are invested leave workers worse off? We analyze social risks of allowing choice, using the Social Security system as an example. Comparing a privatized alternative with the current system via simulation, we document that choice in both equity allocation and equity composition lead to increased income...

We document economically large cross-sectional differences in the before- and after-fee returns earned by speculative traders. We establish this result by focusing on day traders in Taiwan from 1992 to 2006. We argue that these traders are almost certainly speculative traders given their short holding period. We sort day traders based on their retu...

In an experimental setting, we study the role of emotions in markets. Our experimental market is modeled on those of Smith, Suchanek, and Williams (1988) and Caginalp, Porter, and Smith (2001). Participants play part in a laboratory market where they can trade a risky asset over a computer network. Prior to the market simulation, they watch short v...

We examine cooperative behavior when large sums of money are at stake, using data from the television game show Golden Balls. At the end of each episode, contestants play a variant on the classic prisoner's dilemma for large and widely ranging ...

ABSTRACTA risk-averse manager’s overconfidence makes him less conservative. As a result, it is cheaper for firms to motivate him to pursue valuable risky projects. When compensation endogenously adjusts to reflect outside opportunities, moderate levels of overconfidence lead firms to offer the manager flatter compensation contracts that make him be...

We provide an overview of research on the stock trading behavior of individual investors. This research documents that individual investors (1) underperform standard benchmarks (e.g., a low cost index fund), (2) sell winning investments while holding losing investments (the “disposition effect”), (3) are heavily influenced by limited attention and...

We establish two previously undocumented patterns in the purchase selections of individual investors. These patterns hinge on investors’ previous experiences with a stock. We demonstrate that investors prefer to (1) repurchase stocks they previously sold for a gain rather than stocks they previously sold for a loss and (2) repurchase stocks that ha...

No abstract available.

The use of H-1B and other work visas to hire foreign information technology (IT) professionals in the United States has attracted significant controversy and policy debates. On one hand, hiring high-skill foreign IT professionals on work visas can be ...

No abstract available.

Research on bidding in auctions has generally relied on the assumption of self-interested bidders. This work relaxes that assumption in the context of charity auctions. Because understanding charitable motives has important implications for auction design ...

To mitigate the threat that terrorists smuggle weapons of mass destruction into the United States through maritime containers, the U.S. Bureau of Customs and Border Protection (CBP) inspects containers upon entry to domestic ports. Inspection-driven ...

This paper develops and empirically confirms a theory that explains why media content predicts takeover outcomes. It shows why target shareholders pay attention to the news, despite the risk of distorted reporting. To test the model's prediction, this paper constructs a novel empirical measure that quantifies text-based media content pertaining to...

We analyze trading records for 66,465 households at a large discount broker and 665,533 investors at a large retail broker to document that the trading of individuals is highly correlated and persistent. This systematic trading of individual investors is not primarily driven by passive reactions to institutional herding, by systematic changes in ri...

On January 9th 2009, Terry Odean and Betty Simkins interviewed Vernon L. Smith for this issue of the Journal of Applied Finance. Vernon Smith is widely regarded as the "father of experimental economics" for his pathbreaking work in this area. After decades of research, the once novel field of ‘experimental economics’ has become a recognized strand...

Individual investor trading results in systematic and economically large losses. Using a complete trading history of all investors in Taiwan, we document that the aggregate portfolio of individuals suffers an annual performance penalty of 3.8 percentage points. Individual investor losses are equivalent to 2.2% of Taiwan's gross domestic product or...

We study the trading of individual investors using transaction data and identifying buyer- or seller-initiated trades. We document four results: (1) Small trade order imbalance correlates well with order imbalance based on trades from retail brokers. (2) Individual investors herd. (3) When measured annually, small trade order imbalance forecasts fu...

We study the trading of individual investors using transaction data and identifying buyer- or seller-initiated trades. We document four results: (1) Small trade order imbalance correlates well with order imbalance based on trades from retail brokers. (2) Individual investors herd. (3) When measured annually, small trade order imbalance forecasts fu...

seminar participants at the UT-Austin Accounting-Finance Mini-Conference, the Finance Forum at the Federal Reserve Board, University of Alberta, Barclays Global Investors, UC Davis, the 2007 Fall NBER Behavioral Meeting (Cambridge, MA), and 2008 WFA Meeting (Hawaii) for helpful discussions and valuable comments. In addition, we would like to thank...

We test and confirm the hypothesis that individual investors are net buyers of attention-grabbing stocks, e.g., stocks in the news, stocks experiencing high abnormal trading volume, and stocks with extreme one-day returns. Attention-driven buying results from the difficulty that investors have searching the thousands of stocks they can potentially...

In the context of a capital budgeting problem, we show how and when a manager's overconfidence can be beneficial to a firm. Risk-averse managers sometimes choose to stay away from risky projects that would increase firm value. Overconfident managers overestimate their personal ability to reduce risk, and as a result may make capital budgeting decis...

We find that trends and reversals in past earnings surprises predict future stock returns. These earnings surprise sequences produce a 9.88% risk-adjusted annual re-turn which cannot be attributed to momentum nor post-earnings announcement drift. Our empirical methodology captures the market's beliefs regarding future returns by estimating the prob...

We ask whether the typical investor and the aggregate investor exhibit a bias known as the disposition effect, the tendency to sell investments that are held for a profit at a faster rate than investments held for a loss. We analyse all trading activity on the Taiwan Stock Exchange (TSE) for the five years ending in 1999. Using a dataset that conta...

"We ask whether the typical investor and the aggregate investor exhibit a bias known as the disposition effect, the tendency to sell investments that are held for a profit at a faster rate than investments held for a loss. We analyse all trading activity on the Taiwan Stock Exchange (TSE) for the five years ending in 1999. Using a dataset that cont...

We document that individual investor trading results in systematic and, more importantly, economically large losses. Using a complete trading history of all investors in Taiwan, we document that the aggregate portfolio of individual investors suffers an annual performance penalty of 3.8 percentage points. Individual investor losses are equivalent t...

We study the trading behavior of individual investors using the Trade and Quotes (TAQ) and Institute for the Study of Security Markets (ISSM) transaction data over the period 1983 to 2001. We document four results: (1) Order imbalance based on buyer- and sellerinitiated small trades from the TAQ/ISSM data correlates well with the order imbalance ba...

We argue that the purchase decisions of mutual fund investors are influenced by salient, attention-grabbing information. Investors are more sensitive to salient, in-your-face fees, like front-end loads and commissions, than operating expenses; they buy funds that attract their attention through exceptional performance, marketing, or advertising. We...

1 We are grateful to the Taiwan Stock Exchange for providing the data used in this study. Michael Bowers provided excellent computing support. Barber appreciates the National Science Council of Taiwan for underwriting a visit to Taipei, where Timothy Lin (Yuanta Core Pacific Securities) and Keh Hsiao Lin (Taiwan Securities) organized excellent over...

Using brokerage account data, we analyze the tax awareness of individual investors. We find strong evidence that taxes matter: investors prefer to locate bonds and mutual funds in retirement accounts and, in December, harvest stock losses in their taxable accounts. However, investors also trade actively in their taxable accounts, realize gains more...

In this paper we compare the investment decisions of groups (stock clubs) and individuals. Both individuals and clubs are more likely to purchase stocks that are associated with good reasons (e.g., a company that is featured on a list of most admired companies). However, stock clubs favor such stocks more than individuals despite the fact that such...

Managers make decisions on behalf of shareholders. In this context, financial economists have promoted executive stock options as a means to realign the incentives of managers with those of shareholders. We argue that overconfidence and optimism, which are likely to characterize managers, provide an alternative solution to this agency problem. Wher...

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 1992 to 1995. We document that young men who are active traders with high incomes and a preference for investing in small growth stocks with high market risk are more likely to switch to onli...

Theoretical models predict that overconfident investors trade excessively. We test this prediction by partitioning investors on gender. Psychological research demonstrates that, in areas such as finance, men are more overconfident than women. Thus, theory predicts that men will trade more excessively than women. Using account data for over 35,000 h...

We develop a multiperiod market model describing both the process by which traders learn about their ability and how a bias in this learning can create overconfident traders. A trader in our model initially does not know his own ability. He infers this ability from his successes and failures. In assessing his ability the trader takes too much credi...

Modern financial economics assumes that we behave with extreme rationality but we do not. Furthermore, our deviations from rationality are often systematic. Behavioral finance relaxes the traditional assumptions of financial economics by incorporating these observable, systematic, and very human departures from rationality into standard models of f...

The financial press makes frequent and bold claims regarding the performance of investment clubs. One oft quoted figure from a National Association of Investment Club survey states that 60 percent of investment clubs beat the market. Are these claims myth or reality? We analyze the common stock investment performance of 166 investment clubs using a...

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 did not trade online. We find that those who switch to online trading experien...

This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection a...

The field of modern financial economics assumes that people behave with extreme rationality, but they do not. Furthermore, people's deviations from rationality are often systematic. Behavioral finance relaxes the traditional assumptions of financial economics by incorporating these observable, systematic, and very human departures from rationality...

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 December 1996. The average household tilts their common stock investment toward high-beta, small, value stocks, and turns over 80 per cent of their portfolio annual...

Psychological studies establish that people are usually overconfident and that they systematically overweight some types of information while underweighting others. How overconfidence affects a financial market depends on who in the market is overconfident and on how information is distributed. This paper examines markets in which price-taking trad...

I test the disposition effect, the tendency of investors to hold losing investments too long and sell winning investments too soon, by analyzing trading records for 10,000 accounts at a large discount brokerage house. These investors demonstrate a strong preference for realizing winners rather than losers. Their behavior does not appear to be motiv...

Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that traded most earned an annual return of 11.4 percent, while the market returned 17.9 percent. The average household earned an annual return of 16.4...

No abstract available.

The article presents an interview with Vernon L. Smith, winner of the 2002 Nobel Prize in Economic Sciences. Smith discusses his belief that behavioral and experimental economics are complementary. He comments upon optimal bidding behavior in auctions as revealed by some of his earlier work. In his view asset bubbles can be modeled, but not fully e...

Thesis (Ph. D. in Business Administration)--University of California, Berkeley, May 1997. Includes bibliographical references.