RFS Advance Access published online on September 20, 2009
Review of Financial Studies, doi:10.1093/rfs/hhp060
Learning by Trading
Chicago GSB
Ross School of Business, University of Michigan
Kelley School of Business, Indiana University
Send correspondence to Tyler Shumway at the Ross School of Business, University of Michigan, 701 Tappan Street, Ann Arbor, MI, 48109; telephone: (734) 763-4129; fax: (734) 936-0274. E-mail: shumway{at}umich.edu
JEL Classification: D10, G10
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Abstract |
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Using a large sample of individual investor records over a nine-year period, we analyze survival rates, the disposition effect, and trading performance at the individual level to determine whether and how investors learn from their trading experience. We find evidence of two types of learning: some investors become better at trading with experience, while others stop trading after realizing that their ability is poor. A substantial part of overall learning by trading is explained by the second type. By ignoring investor attrition, the existing literature significantly overestimates how quickly investors become better at trading.
We thank Brad Barber, Dan Bernhardt, James Choi, Juhani Linnainmaa, Uday Rajan, Mark Seasholes, Morten Sorensen, Matthew Spiegel (the editor), Ning Zhu, two anonymous referees, and seminar participants at the 2007 Western Finance Association meeting, the 2007 Wharton Household Portfolio Choice conference, Carnegie Mellon University, Nanyang Technical University, National University of Singapore, Singapore Management University, University of California at Irvine, University of Edinburgh, University of Manchester, University of Toronto, and University of Michigan for helpful comments. Any remaining errors are ours. We are grateful to Jussi Keppo for helping us to acquire the data used in this study, and to the Mitsui Life Financial Research Center at the University of Michigan for funding. We also thank Jarkko Heinonen and Monica Bergström at the Helsinki Exchange for helping us with the data.