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Trading performance, disposition effect, overconfidence, representativeness bias, and experience of emerging market investors
Author(s) -
Chen Gongmeng,
Kim Kenneth A.,
Nofsinger John R.,
Rui Oliver M.
Publication year - 2007
Publication title -
journal of behavioral decision making
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.136
H-Index - 76
eISSN - 1099-0771
pISSN - 0894-3257
DOI - 10.1002/bdm.561
Subject(s) - disposition effect , overconfidence effect , representativeness heuristic , proxy (statistics) , behavioral economics , investment decisions , disposition , economics , categorization , financial economics , china , monetary economics , investment (military) , emerging markets , business , microeconomics , finance , psychology , social psychology , paleontology , philosophy , context (archaeology) , epistemology , machine learning , politics , computer science , political science , law , biology
Using brokerage account data from China, we study investment decision making in an emerging market. We find that Chinese investors make poor trading decisions: the stocks they purchase underperform those they sell. We also find that Chinese investors suffer from three behavioral biases: (i) they tend to sell stocks that have appreciated in price, but not those that have depreciated in price, consistent with a disposition effect, acknowledging gains but not losses; (ii) they seem overconfident; and (iii) they appear to believe that past returns are indicative of future returns (a representativeness bias). In comparisons to prior findings, Chinese investors seem more overconfident than U.S. investors (i.e., the Chinese hold fewer stocks, yet trade very often) and their disposition effect appears stronger. Finally, we categorize Chinese investors based on proxy measures of experience and find that “experienced” investors are not always less prone to behavioral biases than are “inexperienced” ones. Copyright © 2007 John Wiley & Sons, Ltd.

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