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RFS Advance Access published online on April 19, 2008
Review of Financial Studies, doi:10.1093/rfs/hhn046
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© The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org

Just How Much Do Individual Investors Lose by Trading?

Brad M. Barber
Graduate School of Management, University of California

Yi-Tsung Lee
National Chengchi University

Yu-Jane Liu
Guanghua School, Peking University and National Chengchi University

Terrance Odean
Haas School of Business, University of California

Address correspondence to Terrance Odean, Haas School of Business, University of California, Berkeley, CA 94720; telephone: 510-642-6767; e-mail: odean{at}haas.berkeley.edu and faculty.haas.berkeley.edu/odean.

JEL Classification: G11, G14, G15, H31


  Abstract

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 2.8% of the total personal income. Virtually all individual trading losses can be traced to their aggressive orders. In contrast, institutions enjoy an annual performance boost of 1.5 percentage points, and both the aggressive and passive trades of institutions are profitable. Foreign institutions garner nearly half of institutional profits.

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 overviews of their trading operations. We appreciate the comments of Ken French, Charles Jones, Owen Lamont, Mark Kritzberg, Victor W. Liu, and seminar participants at UC Berkeley School of Law, UC-Davis, University of Illinois, the Indian School of Business, National Chengchi University, University of North Carolina, University of Texas, Yale University, the Wharton 2004 Household Finance Conference, American Finance Association 2006 Boston Meetings, the Taiwan Financial Supervisory Commission, and the 12th Conference on the Theory and Practice of Securities and Financial Markets (Taiwan). Terrance Odean is grateful for the financial support of the National Science Foundation (grant no. 0222107). Yu-Jane Liu gratefully acknowledges the financial support from National Natural Science Foundation of China (grant no. 70432002).


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