Learning By Trading

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. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

[1]  Li Jin.  Inheriting Losers , 2010 .

[2]  Juhani T. Linnainmaa,et al.  Do Limit Orders Alter Inferences About Investor Performance and Behavior? , 2009 .

[3]  Brigitte C. Madrian,et al.  Reinforcement Learning and Savings Behavior , 2007, The Journal of finance.

[4]  Stefan Nagel,et al.  Inexperienced Investors and Bubbles , 2008 .

[5]  Z. Ivkovich,et al.  Portfolio Concentration and the Performance of Individual Investors , 2004, Journal of Financial and Quantitative Analysis.

[6]  George M. Korniotis.  Superior Information or a Psychological Bias? A Unified Framework with Cognitive Abilities Resolves Three Puzzles∗ , 2008 .

[7]  D. Bernhardt,et al.  Financial Speculators' Underperformance: Learning, Self‐Selection, and Endogenous Liquidity , 2007 .

[8]  Laurent E. Calvet,et al.  Fight or Flight? Portfolio Rebalancing by Individual Investors , 2007 .

[9]  Mark S. Seasholes,et al.  Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets , 2005 .

[10]  William N. Goetzmann,et al.  Why Do Individual Investors Hold Under-Diversified Portfolios? , 2005 .

[11]  Tyler Shumway,et al.  Does Disposition Drive Momentum , 2005 .

[12]  Andrea Frazzini,et al.  The Disposition E ff ect and Underreaction to News , 2006 .

[13]  Once Burned, Twice Shy: Naive Learning, Counterfactuals and the Repurchase of Stocks Previously Sol , 2004 .

[14]  Liang Peng,et al.  Do Individual Investors Learn from Their Trading Experience , 2009 .

[15]  J. List.  Does market experience eliminate market anomalies , 2003 .

[16]  Günter Strobl.  Information Asymmetry, Price Momentum, and the Disposition Effect , 2003 .

[17]  Z. Ivkovich,et al.  Local Does as Local is: Information Content of the Geography of Individual Investors' Common Stock Investments , 2002 .

[18]  Markus K. Brunnermeier,et al.  Synchronization risk and delayed arbitrage , 2002 .

[19]  J. Lewellen,et al.  Learning, Asset-Pricing Tests, and Market Efficiency , 2002 .

[20]  Ľuboš Pástor,et al.  Stock Valuation and Learning About Profitability , 2002 .

[21]  Alexander Dyck,et al.  The Bubble and the Media , 2002 .

[22]  Bing Han,et al.  Prospect Theory, Mental Accounting, and Momentum , 2004 .

[23]  Jeffrey M. Wooldridge,et al.  Solutions Manual and Supplementary Materials for Econometric Analysis of Cross Section and Panel Data , 2003 .

[24]  Shlomo Benartzi,et al.  Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock , 2001 .

[25]  Mark Grinblatt,et al.  How Distance, Language, and Culture Influence Stockholdings and Trades , 2001 .

[26]  Tyler Shumway,et al.  Do Behavioral Biases Affect Prices? , 2001 .

[27]  David Genesove,et al.  Loss Aversion and Seller Behaviour: Evidence from the Housing Market , 2001 .

[28]  Joel Sobel,et al.  Economists' Models of Learning , 2000, J. Econ. Theory.

[29]  Zur Shapira,et al.  Patterns of Behavior of Professionally Managed and Independent Investors , 2000 .

[30]  Mark Grinblatt,et al.  What Makes Investors Trade? , 2000 .

[31]  Mark Grinblatt,et al.  The investment behavior and performance of various investor types: a study of Finland's unique data set , 2000 .

[32]  Jeffrey M. Wooldridge,et al.  Introductory Econometrics: A Modern Approach , 1999 .

[33]  L. Argote.  Organizational Learning: Creating, Retaining and Transferring Knowledge , 1999 .

[34]  Edward Chancellor,et al.  Devil Take the Hindmost: A History of Financial Speculation , 1999 .

[35]  Brad M. Barber,et al.  Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment , 1998 .

[36]  Terrance Odean.  Do Investors Trade Too Much? , 1998 .

[37]  Terrance Odean,et al.  Learning to Be Overconfident , 1997 .

[38]  Mark M. Carhart.  On Persistence in Mutual Fund Performance , 1997 .

[39]  Terrance Odean,et al.  Are Investors Reluctant to Realize Their Losses? , 1996 .

[40]  Jeffrey M. Wooldridge,et al.  Selection corrections for panel data models under conditional mean independence assumptions , 1995 .

[41]  E. Fama,et al.  Common risk factors in the returns on stocks and bonds , 1993 .

[42]  Sheridan Titman,et al.  On Persistence in Mutual Fund Performance , 1997 .

[43]  M. Verbeek,et al.  Testing for selectivity bias in panel data models , 1992 .

[44]  M. C. Jones,et al.  A reliable data-based bandwidth selection method for kernel density estimation , 1991 .

[45]  Colin Camerer,et al.  The Disposition Effect in Securities Trading: An Experimental Analysis , 1991 .

[46]  L. Summers,et al.  The Survival of Noise Traders in Financial Markets , 1988 .

[47]  J. Woodroffe,et al.  A learning experience. , 1987, New Zealand hospital.

[48]  G. Constantinides.  The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence: Discussion , 1985 .

[49]  M. Statman,et al.  The disposition to sell winners too early and ride losers too long , 1985 .

[50]  D. Cox,et al.  Analysis of Survival Data. , 1985 .

[51]  Myron S. Scholes,et al.  Estimating betas from nonsynchronous data , 1977 .

[52]  Leonard J. Mirman,et al.  A Bayesian Approach to the Production of Information and Learning by Doing , 1977 .

[53]  H. Sluiter.  [Learning by doing]. , 1977, Nederlands tijdschrift voor geneeskunde.

[54]  J. Heckman.  The Common Structure of Statistical Models of Truncation, Sample Selection and Limited Dependent Variables and a Simple Estimator for Such Models , 1976 .

[55]  K. Arrow.  The Economic Implications of Learning by Doing , 1962 .

[56]  W. Bion,et al.  Learning from experience , 2007 .

[57]  D.,et al.  Regression Models and Life-Tables , 2022 .