Behavioral Biases, Investor Performance, and Wealth Transfers between Investor Groups

Abstract

Using a very large and special database that includes the entire universe of orders and trades of Indian investors over eighteen months, the present study makes several new contributions to the existing literature on the role of behavioral biases in stock market performance of investors. We consider the relative effects of disposition effect and investor overconfidence in a unified framework. The framework also includes other investor-specific factors that have been identified in the existing literature as important in explaining investor performance. We also investigate whether the magnitude of the two behavioral biases differs among separate categories of investors, including individual investors, non-financial corporations and financial institutions and, importantly, if and how the effects of the biases on trading performance vary across different investor categories. Finally, we examine the joint effects of investor category and the magnitude of behavioral biases on an investor's performance. We find that individual investors suffer from higher disposition coffeficient as well as higher sensitivity of disposition bias to performance than the other investor categories. The results identify disposition bias as a direct channel of wealth transfer between investor categories.

Keywords: individual investors, trading behavior, disposition effect

JEL Classification: D19, G14