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 . . . Trigger-happy traders are prone to shooting themselves in the foot.
Brad Barber and Terrance Odean in Online Investors: Do the Slow Die First? (pdf - September 1999)Derivatives are most frequently touted for their ability to reduce risk. These instruments, and the strategies that exploit them, have undoubtedly contributed to economic growth by fostering liquidity and the creation of capital. They have also fostered the illusion of a safe haven offering seemingly unlimited investment returns with virtually no risk. In truth, derivatives-related strategies often entail or lead to trading demands than can add to, rather than mitigate, overall market instability . . . Given human nature, many investors are probably unable to resist the allure of strategies that promise both increased returns and reduced risk. Investors should thus fasten their seatbelts for more bumpy rides ahead. The good news is that investors who can afford to persevere, buying and holding equities in a diversified asset portfolio, can expect to win out in the long run.
Bruce I. Jacobs in Capital Ideas and Market Realities (book web site)
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