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FM301 Part 2 > Week 9 - Investor Behaviour > Flashcards

Week 9 - Investor Behaviour Flashcards

1
Q

Study of individual investors

A

Household finance

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2
Q

Data on household finance

A
  • Survey of consumer finances
  • Brokerage data
  • Finnish Data
  • Swedish Data
  • 401k data
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3
Q

Facts about individual investors

A
  • Non-Participation
  • Buying high, selling low
  • Life-cycle behaviour
  • Under-diversification
  • Preference for active management
  • Stock-picking performance
  • Selling behaviour
  • Buying behaviour
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4
Q

Non-participation

A
  • Basic rational model without frictions predicts that people will participate in risky assets
  • surprisingly, a large fraction of the population, even wealthy people, doe not participate in the stock market
  • worse in earlier years (28% in 1984, 48% for those >100,000 in liquid assets)
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5
Q

Non-Participation facts

A
  • Participation is positively related to education, income and wealth
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6
Q

Cross country participation trends

A
  • As traditional gender role attitudes increase in a country, the share of direct participation in stock market decreases
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7
Q

Rational explanations for Non-Participation

A
  • Transaction costs
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8
Q

Buying high, selling low pehnomenon

A
  • Evidence that some groups of investors buy high and sell low
  • Increase exposure to a risky asset class in advance of low returns
  • Decrease exposure in advance of high returns
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9
Q

Evidence on Buy high, sell low

A
  • Dollar weighted average return on mutual funds is lower than the time-weighted average by 1.5% per year
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10
Q

Life Cycle Behaviour of risky asset exposure

A

Most rational models predict that the share of financial wealth allocated to risky assets will decline over life cycle

  • Empirical evidence is broadly consistent with this
  • Empirical level of risky asset holdings is lower than predicted
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11
Q

Under-Diversification

A
  • Basic rational model without frictions predicts that people will holds diversified portfolios
  • Empirically, many households appear to be under-diversified
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12
Q

Under-Diversification Type 1

A

Type 1: Home Bias

  • Households allocate a large fraction of equity holdings to domestic equity
  • Eg. in 1989, in US, UK, and Japan - 94, 82 and 98% of equity holdings were in domestic equity
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13
Q

Under-Diversification Type 2

A

Local Bias
- Households allocate a large fraction of their domestic equity holdings to stocks headquartered locally

  • Using Odean Brokerage data, Ivkovich and Weisbenner show that 31% of stocks are located within 250 miles of investor, v 12% of all stocks
  • Average distance of Portfolio is 917 miles, average distance to all stocks: 1225 miles
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14
Q

Under-Diversification Type 3

A

Concentrated holdings of individual stocks
- Underdiversified definition: more than 50% of equity exposure in brokerage account with less than 10 stocks

  • in 1989, approximately 30% are undiversified
  • 2001, 14% are undiversified
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15
Q

Under-Diversification Type 4

A

Large Holdings of own-company stock
- in 401K retirement plans, people allocate large amount to the stock of their own company
- out of 154 firms in the S&P500 studied: 90 are cash-match firms, 64 are stock-match
- Across all plans, people invest 23% of discretionary contributions in company stock - 18% are cash-match, 29% stock-match

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16
Q

Actively-managed funds Facts

A
  • Average net return of actively managed funds appears to be below that of index funds
  • In basic rational model without frictions, average net returns of active and index funds should be the same
  • Poor performance of active funds suggests that these funds may be too popular
17
Q

Actively-managed funds fund flows

A
  • fund flows are a positive function of past alpha - relatively little persistence in fund alphas
  • The basic rational model predicts that fund flows should not predict alpha - no fund characteristic should predict alpha
  • However, several variable do eg. active share, fund size, manager education

Overall: fund flows may not be fully rational

18
Q

Stock-Picking performance

A

Study: 66,000 households through large, discount brokerage firm from 1991 to 1996

Findings: net returns of typical households is below range of benchmarks:
- Household’s beginning of the year portfolio
- Value-weighted market return
- CAPM benchmark
- 3-Factor Benchmark

19
Q

Selling Behaviour

A
  • Individuals have a greater propensity to sell a stock trading at a gain relative to purchase price than one trading at a loss - disposition effect
20
Q

Selling Behaviour Disposition effect

A
  • On any day on which an investor sells a stock in his portfolio, put each stock in his portfolio into one of four buckets: realised gain, paper gain, realised loss, paper loss
  • Count up number of items in each bucket across all investors and over full sample
  • Compute: proportion of gains realised (PGR) & proportion of losses realised (PLR)
  • Disposition effect: PGR > PLR
21
Q

Selling Behaviour Rational explanations

A
  • Information
  • Liquidity
  • Taxes
  • Rebalancing
22
Q

Selling Behaviour Behavioural Explanations

A
  • Prospect Theory
  • Mean-Reverting beliefs
  • Cognitive Dissonance
  • Realisation Utility
23
Q

Disposition effect across different groups of investors

A

Stronger for less sophisticated investors:
- More sophisticated investors exhibit the effect less
- Mutual fund managers exhibit it, but less than individuals
- Households also exhibit a disposition effect in the real estate market

24
Q

Selling Propensity v returns since purchase

A

Selling propensity has a V-Shaped relationship with returns since purchase
- Selling propensity also depends on a stock’s rank in the investor’s portfolio

25
Q

Buying Propensity

A
  • Barber and Odean (2009) find that individual’s buying propensity is a positive function of a stock’s past returns
26
Q

Institutional Investors

A
  • Basic Frictionless model with skilled managers and rational investors predicts that mutual fund’s gross alpha will be positive on average and net alpha will be zero on average
  • In practice, gross alpha is positive but not substantially so

FM301 Part 2 (4 decks)

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