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Which Investment Behaviors Really Matter for Individual Investors?

Joachim Weber, Steen Meyer , Benjamin Loos, and Andreas Hackethal Goethe University, Frankfurt am Main

ABSTRACT Using a European discount broker data set we simultaneously analyze the performance impact of ten measures of investment behavior proposed in the literature. Only underdiversication and lottery-stock preference are signicantly related to returns and also economically large. Eliminating these investment behaviors would improve the average investors returns relative to other investors in our sample by 4% for under-diversication and 3% for lottery-stock preference.

January 2014

Keywords: Individual investors, behavioral biases, portfolio performance JEL classication: G11, D14

This research would not have been possible without the support of a large discount broker. We thank this company and its employees for helping us create the data set used in this study. We also thank Alok Kumar for helpful comments. Corresponding author: Grueneburgplatz 1, 60323 Frankfurt am Main, Germany; tel. +49 (69) 798 33675; fax +49 (69) 798 33530; e-mail meyer@nance.uni-frankfurt.de.

Electronic copy available at: http://ssrn.com/abstract=2381435

Which Investment Behaviors Really Matter for Individual Investors?

ABSTRACT Using a European discount broker data set we simultaneously analyze the performance impact of ten measures of investment behavior proposed in the literature. Only underdiversication and lottery-stock preference are signicantly related to returns and also economically large. Eliminating these investment behaviors would improve the average investors returns relative to other investors in our sample by 4% for under-diversication and 3% for lottery-stock preference.

January 2014

Keywords: Individual investors, behavioral biases, portfolio performance JEL classication: G11, D14

This research would not have been possible without the support of a large discount broker. We thank this company and its employees for helping us create the data set used in this study. We also thank Alok Kumar for helpful comments.

Electronic copy available at: http://ssrn.com/abstract=2381435

1.

Introduction

There is ample evidence for systematic patterns in the investment behavior of individual investors, which deviate from standard nance theory. For instance, it has been shown that individual investors trade too much (Barber and Odean, 2000), gamble in the stock market (Kumar, 2009), do not adequately diversify their portfolios (Goetzmann and Kumar, 2008), or exhibit home (French and Poterba, 1991) or local bias (Ivkovi c and Weisbenner, 2005). This research has usually either focused on determining whether one type of behavior is positively or negatively associated with returns on single investors stock investments or on the aggregate level in order to determine the impact of investment mistakes on the welfare of larger groups of investors (Calvet, Campbell, and Sodini, 2007; Meyer et al., 2012). This paper adds a novel perspective to the research on individual investor investment behavior. Instead of looking at a single investment behavior, like for example home bias or trading activity, and its link to investment performance, this paper estimates the performance impact of a broad range of proxies (ten dierent measures) for individual investor behavior on investment performance. This allows to identify which of the ten investment behaviors has the largest eect on the performance of investors. Additionally, the paper also broadens the scope of research because it does not only focus on stock holdings, but extends the analysis to individual investors entire investment portfolio of stocks, mutual funds, bonds, warrants and other marketable securities. We use a data set provided by a large European discount broker that is very similar to the U.S. discount broker data of Odean (1998a), which has subsequently been used in a multitude of studies on individual investor behavior. Whereas our data set and the one by Odean (1998a) are highly comparable in key dimensions such as investor

demographics and share of stock holdings, the key advantage of our data set is that it covers a much longer time period. The data starts in 1999 and ends in 2011. In fact, it spans a full business cycle and parts of the current business cycle according to National Bureau of Economic Research (NBER) business cycle dating (NBER, 2013).1 We use the individual trading records and monthly position statements from the data set to construct ten proxies for investment behavior that have been discussed in the literature. We construct all measures separately for investors entire (full) portfolios, their stock holdings, and their investment fund holdings. In particular, we compute the following measures of individual investor behavior:

1. Portfolio turnover: Active trading volume (excluding savings plans) scaled by portfolio value as a proxy for trading activity and investor overcondence. 2. Trade clustering: Clustering of investors trades in time as a proxy for the absence of narrow framing (a narrow-framing investor makes investment decisions individually and not in a portfolio context). 3. Disposition eect: Tendency to sell securities that have increased in value and keep those that have lost value. 4. Leading turnover: Tendency to systematically trade before other investors (in the same security in the same direction). 5. Forecasting skill: Ability to systematically realize excess returns on purchased securities. 6. Trend chasing: Tendency to purchase funds that have recently increased in value.

According to the NBER, the last full US business cycle was either March 2001 to December 2007 (trough to trough) or November 2001 to June 2009 (peak to peak).

7. Home bias: Preference for investing in German stocks or funds with Germany as their investment theme, thus neglecting international diversication. 8. Local bias: Preference for investing in local stocks (i.e., in companies with headquarters close to the investor) or local funds (i.e., funds managed by companies geographically close to the investor). 9. Lottery-stock preference: Investment in stocks with lottery-like characteristics (low price, high idiosyncratic volatility, and high idiosyncratic skewness). 10. Under-diversication: Investment in only a few securities and/or highly correlated securities.

As a baseline we test the univariate relation between our investment behavior proxies and portfolio performance. Results are in line with those from existing literature. The multivariate research design we then employ builds on classical asset pricing studies (e.g., Fama and French, 1992). We treat our investors portfolios as individual assets and run a full cross-sectional time-series regression of monthly portfolio performance on investment behavior proxies. All investment behavior proxies are measured ex-ante (over or at the end of the previous month) whenever this is feasible. As the investment behavior proxies do not change by a large margin from month to month, measuring investment behavior at the end of the previous month appears sensible. Using ex-ante measures allows avoiding potential spurious eects between investment behavior proxies and performance. Additionally, cross- and auto-correlation may cause biased estimates. Our results are, however, robust to cross-correlation and auto-correlation eects in the dependent variables as we use two-way clustered standard-errors (cf. Cameron, Gelbach, and Miller, 2011; Petersen, 2009). They also prove to be robust to dierent performance measures (excess returns over the risk-free rate, multi-factor alphas, Sharpe ratios), and 3

the use of dierent performance benchmarks (German Composite Stock Index (CDAX), MSCI All Country World Index). In all regressions we control for investor attributes and portfolio composition and perform a peer-group adjustment for all measures of investment behavior to avoid biases that might stem from dierent levels of wealth or trading activity. The key results of our study can be summarized as follows: First, cross-sectional dierences in portfolio risk measured as factor betas explain about twice the share of variance in portfolio returns relative to our measures of investment behavior. Portfolio risk must therefore still be considered the major driver of returns. Secondly, only two out of ten measures are reliably statistically signicant across dierent performance measures. These are under-diversication and lottery-stock preference. Both measures are negatively associated with portfolio performance. This is in line with expectations. Given that individual investors are not very skilled (Barber et al., 2009) it is plausible that less-diversied investors to do not have an information advantage. Therefore, these investors should not be able to benet from taking on idiosyncratic risk. Moreover, Ang et al. (2006, 2009) provide evidence that, on a security level, there is a negative relation between returns and idiosyncratic volatility. Therefore, it seems plausible that investors who buy lottery stocks2 should suer a performance penalty. The eect of these behaviors on performance holds if we either consider the full portfolio of the investors or stock holdings only. Although the vast majority of investment behavior measures were originally used to characterize stock investments, they prove to be equally important and signicant for the full portfolio context. However, these results do not hold for fund investments.3
2 3

Lottery stocks are dened as having, among others, high idiosyncratic volatility. At rst sight these results are contradictory to the ndings of Bailey, Kumar, and Ng (2011). However, they compute their investment behavior measures from investors stock holdings and use these to explain fund portfolio performance. In contrast, we explain fund portfolio performance with investment behavior measures created from investors fund holdings. Our results can therefore plausibly be quite dierent from theirs.

The eects on performance of under-diversication and lottery-stock preference are not only statistically but also economically very signicant for the average investor. Reducing these behaviors by one standard deviation relative to the sample mean would allow investors to improve their annual returns by 3% for lottery-stock preference and 1% for under-diversication. Totally eliminating these biases yields improvements of 4% for under-diversication and 3% for lottery-stock preference. In addition, investors would also improve their riskreturn trade-o, since these behaviors are also positively associated with idiosyncratic portfolio risk. These ndings are particularly important, because these two mistakes can easily be avoided. In fact, these return improvements appear to be reaped by some investors. The performance dierences between quintiles formed on a composite investment behavior measure are very large. Investors in the rst quintile (i.e., those making the fewest mistakes) outperform those in the fth quintile by 8.1% per year (6.1% per year in terms of four-factor alphas). That is, dierences in investment behavior are associated with large dierences in realized performance and those investors who avoid key mistakes realize markedly better returns. There has been a lot of research following Campbells (2006) call to nancial economists to work on insights that allow improving individual investors decision making. For instance, there is some evidence that nancial education programs may improve individuals nancial decision making (see Fox, Bartholomae, and Lee, 2005, for an overview). Yet, the average level of nancial literacy continues to be low (Lusardi and Mitchell, 2007). Programs such as the Save More Tomorrow plan (Thaler and Benartzi, 2004), which target and exploit specic behavioral biases therefore appear to be a promising alternative. Financial advice, on the other hand, is often found not to help investors, either because it is subject to agency conicts, due to the services commission and fee structure, and may be biased (Inderst and Ottaviani, 2009; Hackethal, Haliassos, and Jappelli, 2012), or because investors simply not adhere to it (Bhattacharya et al., 2012). 5

This paper contributes the insight that programs or measures intended to increase diversication and make people aware of the risks lottery stocks entail should substantially improve investment performance. The remainder of this article is structured as follows. Section 2 describes the sample and Section 3 gives an overview of the investment behavior measures and portfolio returns used in this study. Section 4 presents the results from our main analyses and Section 5 provides further results and robustness checks. Finally, Section 6 concludes the paper. Additional tables and details on the construction of investment behavior measures are provided in the Appendixes.

2.

Sample description
The data set used in this study, provided by a large European online discount broker,

comprises 5,000 individual investors and covers the period from January 1999 to November 2011. It consists of a monthly position le, a transaction le, and a le containing investor demographics. The transaction data contain identiers for the investors and traded securities, transaction volumes, prices, and dates, as well as information on order types (orders with and without limits).

Table 1 presents descriptive statistics of the sample. Judging from their demographics, it seems the investors in our sample are highly comparable to those in the large U.S. discount brokerage data set used by Odean (1998a) and many other household nance studies. Comparing panel A of Table 1 with Table I of Barber and Odean (2001, p. 268) reveals that on average investors are slightly above 50 (51.4 and 50.4 years, respectively), are predominantly male (84% and 79%, respectively) and married (60% and 65%, re6

Table 1: Sample descriptive statistics


Mean Panel A: Investor demographics Sex (1 = male) Age (years) Married (1 = yes) HasPhD (1 = yes) IsGerman (1 = yes) Risk class (1 = low risk, 5 = high risk) Relationship with broker (years) Panel B: Portfolio statistics Cash holdings (EUR) Portfolio assets (EUR) Stock share (%) Bond share (%) Fund share (%) Option share (%) Warrant share (%) Other share (%) Number of portfolio securities Number of transactions per year Monthly purchase volume (EUR) Monthly sell volume (EUR) 20,315.94 55,854.09 54.62 3.41 32.48 3.02 4.94 1.54 11.29 35.81 1,326.24 1,246.92 48,686.64 99,244.15 34.68 11.21 33.00 11.31 11.16 5.72 11.42 82.24 2,152.62 2,122.02 -1,787.69 3,593.34 0.00 0.00 0.00 0.00 0.00 0.00 1.94 1.57 103.53 43.18 72,556.83 161,076.88 100.00 22.33 98.22 18.52 27.10 8.03 28.66 124.95 4,154.13 4,184.53 0.84 51.36 0.60 0.07 0.96 3.65 10.97 0.36 12.44 0.49 0.25 0.20 1.49 2.81 0.00 33.00 0.00 0.00 1.00 1.00 5.50 1.00 73.00 1.00 1.00 1.00 5.00 14.58 Std. Dev. P5 P95

spectively). Moreover, when comparing portfolio statistics a high degree of similarity between the two data sets becomes evident again. In our sample investors own portfolios that are worth EUR 55,854 on average. 55% of this value is invested in the stock portfolio, whereas in the U.S. data set we estimate investors to own a portfolio worth EUR 65,548 (own estimate4 ) of which 60% is invested in the stock portfolio. Although otherwise comparable to the U.S. discount broker data set, the data we use have several advantages. First, the data we use covers a time span of almost 13 years and thus spans at least three dierent market phases: the dot-com boom and bust in the early 2000s, the bull market preceding the subprime nancial crisis, and nally the nancial crisis itself. In addition, the data set is more recent and may therefore reect

Barber and Odean (2001) report an average stock holding value of USD 47,000 and an average stock share of about 60%. Converting these USD 47,000 to euros using exchange rates from oanda.com and scaling up to 100% yields the above value of EUR 65,548. Given that we look at time-series averages and that our data set contains two major downturns we deem these values still to be in the same order of magnitude.

current investment behavior better as it fully captures changes in trading and investment behavior, for instance due to the adoption of online trading (cf. Barber and Odean, 2002). Beyond this, our investors are almost exclusively German and 7% of them hold a PhD. This value is higher than in the German population (1.1%, German Federal Bureau of Statistics, 2011), but does not come as a surprise, since education positively inuences nancial market participation (Cole, Paulson, and Shastry, 2012) and discount brokerage clients are generally found to be more sophisticated than the overall population (Dorn and Huberman, 2005). According to the portfolio statistics, they hold not only signicant investment portfolios but also substantial cash assets with the brokerage. The large majority of investment portfolios are concentrated in stocks and mutual funds, although there are a few investors who also hold larger shares of options and retail investment certicates. On average, investors hold 11 dierent securities in their portfolios, indicating that a couple of investors seem to be comparatively well diversied. The mean number of transactions per year of 36 (with a median of 16) shows that investors actively manage their portfolios. Conclusions drawn from investor panel data sets based on administrative data, are usually subject to two major concerns, which may cause biased results. The rst is that investors might leave the sample (attrition) and the second is whether the accounts in these studies are in fact play money accounts. Regarding our data set, attrition does not prove to be a concern. In many months, no investors leave the sample and attrition never climbs higher than very low single-digit percentage gures. Also, more than 95% of investors are invested at all times. In order to test whether the accounts are play money accounts, we compare average portfolio values to ocial statistics. Portfolio values amount to roughly four times the German average security holdings as estimated by the German Federal Bureau of Statistics (German Federal Bureau of Statistics, 2008a).

However, the ocial statistics also contains a lot of zeros as the majority of people in Germany do not participate in the stock market. Therefore, these numbers are hardly comparable. To circumvent this problem, we compare portfolio holdings to self-reported gross annual household incomes for those investors who reported these data. Since income is reported in several ranges, we use the midpoint of each range as a proxy for investor income. The mean ratio of the average portfolio value (over the entire sample period) to annual income is 1.3. It is still 1.2 once we use the lower ends of each range as an income proxy. For comparison, the ratio of total nancial assets to gross household income in the German population is about 1.1 (German Federal Bureau of Statistics, 2008a, 2008b).5 In addition, the ratio of the median portfolio value to median gross income for the German investors surveyed by Dorn and Huberman (2005) is 0.6 and it turns out to be 0.6 for our sample as well.6 Since these ratios are highly comparable, we conclude that results should not be largely biased by play money accounts.

3.

Overview of returns and investment behavior proxies

3.1. Individual investors portfolio returns


We calculate portfolio returns using the methodology introduced by Bhattacharya et al. (2012). For each day, we obtain total returns (reecting dividends and capital actions) for all securities an investor holds and that are available from Datastream. We weight these returns using the holdings values from the end of the previous day. If a
5

We manually calculate this value from total nancial assets and the monthly gross income reported in the above sources. We manually calculate this from the values given in Tables 1 and 2 of Dorn and Huberman (2005, pp. 443 and 447).

transaction in a security occurs, we compute a value-weighted average of the intra-day return on that security and the return implicit in the dierence between the transaction price as recorded by the discount broker and the daily closing price (if an investor sells an entire position, the weight on the intra-day return becomes zero). Since these returns do not take into account transaction costs, we also calculate net returns by subtracting brokerage commissions and exchange fees as a percentage of the position value from the return on each security in which a transaction takes place. The calculation is run three times: once to generate returns for the entire portfolio, once to generate returns for an investors stock investments only, and once for an investors fund investments. Using these return data and our investor-level holdings data, we compute three performance measures. First, we generate monthly portfolio excess returns by compounding daily returns and subtracting the monthly equivalent of the three-months money market rate. Second, we calculate intra-month Sharpe ratios by dividing the mean daily excess return over the risk-free rate by its standard deviation. Third, we compute multi-factor alphas. However, to calculate these alphas, we do not rely on the usual technique of conducting a regression of portfolio returns on benchmark factors. Instead, we implement a holdings-based approach pioneered in the mutual funds literature by Elton, Gruber, and Blake (2011, 2012) that provides more precise results. The idea is to generate bottom-up betas by rst estimating the beta of each security in the portfolio and then value-weighting these betas to generate a portfolio beta. This approach is advantageous if, as the case with mutual funds and individual investors, the beta is not a stable portfolio characteristic but changes dynamically over time. In contrast, estimating beta from a time-series regression using portfolio returns necessarily yields less precise estimates because only an average beta over time can be obtained. Finally, this approach allows us to obtain monthly alphas per investor, giving our tests greater precision and enabling us to measure

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many investment behavior proxies ex-ante, that is, before the returns they are meant to explain are realized. We implement the approach outlined by Elton, Gruber, and Blake (2011, 2012) but deviate in two points: First, instead of weighting security betas, we rst weight returns and then compute betas. According to the authors, this is computationally equivalent if the weights are held constant, which is true in our case. Second, since the data on mutual fund holdings are not available for the funds our investors hold, we treat each fund as one security. At the end of each month, we then obtain weekly return data for all securities in an investors portfolio for the preceding three years and including the current month.7 We combine these returns into a value-weighted portfolio return (using constant weights as of the end of the month) and subtract the risk-free rate. From these data, we calculate betas for each month using a Carhart (1997) four-factor model constructed from the CDAX. In a last step, we utilize these monthly betas to calculate alphas. We compute the average of the beginning-of-month and end-of-month portfolio betas for the four factors and subtract from the monthly portfolio excess return the four factor premiums for that month times their betas:

it = rit K k=1 0.5 (ikt1 + ikt ) F actorikt

(1)

where rit is the portfolio excess return over the risk-free rate realized by investor i in month t; the ikt are the (K = 4) factor betas for the RMRF, SMB, HML, and MOM factors; and the F actorikt are the corresponding factor premiums. For robustness, we also compute bottom-up betas and alphas using a three-factor model constructed from dier-

We require that at least 52 weeks of portfolio return data be available. On average, our beta calculations are based on 154.8 weeks (156 weeks equals three years) of data.

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ences between size, value, and growth MSCI World indexes (cf. Table B.4 in Appendix B). The results of these calculations are presented in Table 2.8 On average, the investors in our sample realize small negative monthly excess returns (-0.47%) in their full portfolio. Gross returns to the stock portfolio are 17 basis points lower, whereas the fund portfolio performs 30 basis points better. As trading costs lower the returns, average monthly net returns are 12 basis points lower than gross returns for the full portfolio, 14 points lower for the stock portfolio, and about seven basis points lower for fund investments. Monthly four-factor alphas computed using the bottom-up betas also reect a slight underperformance in the full and stock portfolios. The fund portfolio has small positive alphas. The R2 of the regressions used to determine the bottom-up betas are always in excess of 50% in all specications and hence quite high. The individual factor loadings are also quite dierent. Investors have high market exposure, with betas of the market factor around one. Their portfolios also load substantially on the size factor, but not as much on the value or momentum factors. In a comparison across portfolios, investors fund investments exhibit the best performance. This nding is consistent across all three performance measures (raw returns, four-factor alphas, and Sharpe ratios) and independent of whether we consider gross or net returns. The dierences between stock and fund portfolios are also all statistically signicant at the 5%-level or better. Statistics for the full portfolio are relatively closer to those of the stock portfolio, which indicates that investors, on average, invest most of their money in single stocks. Consequently, the correlation of full portfolio returns with stock returns is very high ( = 0.93; p = 0.000). Thus it is likely that analyses using the

The returns and Sharpe ratios are winsorized at 2% to ensure that outliers are not driving the results.

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full and stock portfolios will yield similar results. In contrast, the correlation between stock returns and fund returns is signicantly lower ( = 0.58; p = 0.000). Results on investor performance can be considered comparable with those of Schlarbaum, Lewellen, and Lease (1978). Whereas these authors nd a slight outperformance of a value-weighted benchmark when analyzing realized transaction returns, this result turns into underperformance when using an equal-weighted benchmark. Since individual investors tend to overweight small stocks (in line with the ndings on the beta of the size factor), their outperformance result is likely driven by the size premiumas also pointed out by Barber and Odean (2000)and an equal-weighted benchmark might be a more appropriate comparison. Barber and Odean (2000), on the other hand, nd that their sample investors achieve an investment performance very comparable to that of the S&P 500 Index before accounting for trading costs.

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Table 2: Descriptive statistics of portfolio returns and CDAX betas


This table presents statistics of portfolio returns and betas. The variable Gross return is an investors monthly portfolio return in excess of the three-months money market rate. We construct it by rst value-weighting daily total returns (generated from Datastream total return indexes and thus reecting capital measures and dividends) on all securities in an investors portfolio. If a transaction occurs, the actual transaction price is also reected in the daily return on that security. Daily returns are then compounded into monthly returns. The variable N et return is the same return after accounting for transaction fees; Gross alpha and N et alpha are monthly four-factor alphas calculated using bottom-up betas from a Carhart (1997) four-factor model (using returns before and after transaction costs, respectively); Gross Sharpe ratio and N et Sharpe ratio are the ratios of the mean intra-month daily (gross or net) return and its standard deviation; and CDAX,RM RF , CDAX,SM B , CDAX,HM L , and CDAX,M OM are portfolio betas calculated using a Carhart (1997) fourfactor model constructed from the CDAX. To construct monthly betas, we implement an approach similar to that of Elton, Gruber, and Blake (2011, 2012) and generate a three-year history of synthetic backward-looking portfolio returns based on security holdings at the end of each month. Using these synthetic returns, we calculate betas associated with the portfolio 2 are the residual errors and regression an investor holds at the end of each month. The terms RM SECDAX and RCDAX ts, respectively, associated with these analyses. All variables are analogously dened for the stock and fund portions of each investors portfolio. To ensure that outliers are not driving our results, the returns and Sharpe ratios are winsorized at 2%. Mean Panel A: Full portfolio Gross Return N et Return Gross Alpha N et Alpha Gross Sharpe Ratio N et Sharpe Ratio CDAX,RM RF CDAX,SM B CDAX,HM L CDAX,M OM RM SECDAX 2 RCDAX -0.0047 -0.0059 -0.0011 -0.0023 0.0199 0.0155 1.0428 0.3083 0.0154 -0.0424 0.0298 0.5841 0.0014 0.0007 -0.0016 -0.0022 0.0149 0.0107 1.0366 0.2187 0.0363 -0.0347 0.0198 0.6451 0.0800 0.0801 0.0579 0.0579 0.2334 0.2332 0.4851 0.5052 0.3996 0.2866 0.0340 0.2411 -0.1463 -0.1482 -0.0873 -0.0895 -0.3787 -0.3837 0.3003 -0.2408 -0.5784 -0.3742 0.0062 0.0992 0.1118 0.1100 0.0848 0.0830 0.4144 0.4089 1.7750 1.1634 0.5177 0.2942 0.0859 0.8811 Median Std. Dev. P5 P95

Panel B: Stock portfolio Gross Return N et Return Gross Alpha N et Alpha Gross Sharpe Ratio N et Sharpe Ratio CDAX,RM RF CDAX,SM B CDAX,HM L CDAX,M OM RM SECDAX 2 RCDAX -0.0054 -0.0068 -0.0018 -0.0030 0.0110 0.0075 1.1797 0.3021 -0.0197 -0.0838 0.0406 0.5176 -0.0007 -0.0016 -0.0033 -0.0041 0.0068 0.0039 1.1652 0.1690 -0.0055 -0.0897 0.0294 0.5519 0.0961 0.0961 0.0717 0.0717 0.2199 0.2201 0.4644 0.6231 0.5007 0.3349 0.0390 0.2459 -0.1710 -0.1729 -0.1111 -0.1132 -0.3647 -0.3695 0.5245 -0.3761 -0.7735 -0.4976 0.0122 0.0766 0.1406 0.1387 0.1081 0.1063 0.3839 0.3798 1.9354 1.4318 0.6788 0.3667 0.1074 0.8626

Panel C: Fund portfolio Gross Return N et Return Gross Alpha N et Alpha Gross Sharpe Ratio N et Sharpe Ratio CDAX,RM RF CDAX,SM B CDAX,HM L CDAX,M OM RM SECDAX 2 RCDAX -0.0017 -0.0024 0.0010 0.0003 0.0347 0.0293 0.8581 0.3423 0.0898 0.0217 0.0163 0.6190 0.0029 0.0023 -0.0004 -0.0008 0.0309 0.0256 0.8864 0.2914 0.0780 0.0062 0.0141 0.6762 0.0523 0.0523 0.0345 0.0345 0.2424 0.2415 0.3760 0.2800 0.1715 0.1225 0.0109 0.2081 -0.1014 -0.1021 -0.0496 -0.0506 -0.3795 -0.3848 0.0929 -0.0012 -0.1587 -0.1317 0.0039 0.1585 0.0736 0.0730 0.0568 0.0558 0.4434 0.4348 1.4127 0.8783 0.3657 0.2125 0.0379 0.8604

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Table 3: Key variables used in this study


This table briey introduces the investment behavior proxies and other variables used in this study. A detailed description of the calculation of each proxy is provided in Appendix A. The variables listed in panel A (investment behavior measures) are all peer-group adjusted and standardized for the performance analyses below. Peer-group adjustment is performed by subtracting from each measure the mean value for the portfolio-value and trading-frequency quintile to which the investor belongs. This ensures that any mechanical relations between portfolio value, trading frequency, and the investment behavior measures do not drive my results. Variable Theoretical range Description Proxy for Key references

Panel A: Investment behavior measures T urnover Clustering 0 + 01 Monthly portfolio turnover in percent of portfolio value; dened for all securities (T urnoverAll ), stocks (T urnoverStocks ), and funds (T urnoverF unds ) Ratio of days on which an investor trades to number of trades in the preceding 12 months (t 11 through t); dened for all securities (ClusteringAll ), stocks (ClusteringStocks ), and funds (ClusteringF unds ) End-of-month raw portfolio weight of German stocks End-of-month raw portfolio weight of funds investing in German stocks End-of-month market-adjusted portfolio weight of lottery stocks (low price, high idiosyncratic volatility, high idiosyncratic skewness stocks) End-of-month market-adjusted portfolio weight of non-lottery stocks (high price, low idiosyncratic volatility, low idiosyncratic skewness stocks) Monthly dierence between propensity to realize gains and propensity to realize losses on stocks (not to be confused with proportion of gains/losses realized), estimated using a Cox (1972) proportional hazard model Monthly dierence between propensity to realize gains and propensity to realize losses on funds (not to be confused with proportion of gains/losses realized), estimated using a Cox (1972) proportional hazard model Monthly ratio of portfolio return variance to average return variance of securities in portfolio; dened for the full portfolio (N ormV arAll ), stocks (N ormV arStocks ), and funds (N ormV arF unds ) Monthly dierence between an investors value-weighted distance to companies in the market portfolio and her own portfolio Dierence between investors average value-weighted monthly mean distance to head quarters of fund management companies and each investors own distance to these companies Monthly share of transactions in which an investor trades systematically before other sample investors (dened in percent of regular portfolio turnover); dened for all securities (LeaderShareAll ), stocks (LeaderShareStocks ), and funds (LeaderShareF unds ) One minus signicance level from t-test on excess returns on securities purchased for 1 month after purchase times sign of average excess return (calculated for all trades up to month t 2); dened for all securities (F orecastingAll ), stocks (F orecastingStocks ), and funds (F orecastingF unds ) (continued) Overcondence Absence of narrow framing Home bias Home bias Gambling preference (Reverse) gambling preference Aversion to realize losses Aversion to realize losses Underdiversication Barber and Odean (2000, 2001) Kahneman and Lovallo (1993); Kumar and Lim (2008) French and Poterba (1991); Lewis (1999) New in this study Kumar (2009) Kumar (2009) Odean (1998a); Feng and Seasholes (2005) Odean (1998a); Feng and Seasholes (2005); Ivkovi c and Weisbenner (2009) Goetzmann and Kumar (2008)

HomeBiasStocks HomeBiasF unds LotteryP ref N onLotteryP ref

01 01 -1 + -1 + - +

15

DispositionStocks

DispositionF unds

- +

N ormV ar

01

LocalBiasStocks LocalBiasF unds

- + - +

Locality preference, informed trading Locality preference, informed trading Informed trading

Ivkovi c and Weisbenner (2005) Bailey, Kumar, and Ng (2011)

LeaderShare

01

New in this study

F orecasting

-1 1

Informed trading

Nicolosi, Peng, and Zhu (2009)

(continued) T rendChasingF unds Panel B: Control variables Sex Age M arried HasP hD IsGerman RiskClass P ortV al Experience StockShare F undShare OptionShare W arrantShare RM RF,CDAX {0,1} 0 + {0,1} {0,1} {0,1} {1,2,3,4,5} 0 + 0 + 01 01 01 01 - + Gender dummy Investors age in years Marriage dummy Dummy for PhD holders Dummy for German investors (0 = foreign investor, 1 = German investor) Investors self-assessed willingness to take risks (1 = low to 5 = high) Natural logarithm of monthly portfolio value in Euro Monthly cumulative number of executed transactions Monthly raw portfolio weight of stocks Monthly raw portfolio weight of funds Monthly raw portfolio weight of options Monthly raw portfolio weight of retail investment certicates Investors monthly market beta from a CDAX 4-factor model computed backwards using holdings at the end of the month and weekly data for the 3 years preceding the current month Investors monthly SMB beta from a CDAX 4-factor model computed backwards using holdings at the end of the month and weekly data for the 3 years preceding the current month Investors monthly HML beta from a CDAX 4-factor model computed backwards using holdings at the end of the month and weekly data for the 3 years preceding the current month Investors monthly MOM beta from a CDAX 4-factor model computed backwards using holdings at the end of the month and weekly data for the 3 years preceding the current month Overcondence Cognitive abilities, experience Education Risk-taking Wealth Experience Portfolio composition Portfolio composition Sophistication Sophistication Systematic portfolio risk Systematic portfolio risk Systematic portfolio risk Systematic portfolio risk Barber and Odean (2001) Kumar and Korniotis (2013) Kumar and Korniotis (2013) Dorn and Huberman (2005) Vissing-Jorgensen (2004) Seru, Shumway, and Stoman (2010) Elton, Gruber, and Blake (2011, 2012) Elton, Gruber, and Blake (2011, 2012) Elton, Gruber, and Blake (2011, 2012) Elton, Gruber, and Blake (2011, 2012) -1 + Mean prior-year return on funds an investor has purchased up to month t 1 Trend chasing Sirri and Tufano (1998)

16

SM B,CDAX

- +

HM L,CDAX

- +

M OM,CDAX

- +

3.2. Measuring individual investors investment behavior


To comprehensively analyze the relation between individual investment behavior and portfolio performance, we construct a broad range of proxies for individual investor investment behavior. For the sake of brevity, we relegate a detailed description and technical discussion of the proxies employed to Appendix A. In this section, we therefore only provide a brief description of the variables and then discuss their descriptive statistics and the relation between them. To facilitate this discussion, Table 3 provides an overview of the variables used in this study. Table 4 provides descriptive statistics for the investment behavioral measures and Tables B.2 and B.3 in Appendix B provide data on the temporal stability of these measures in the aggregate and on the level of each investor, respectively. Finally, Table 5 summarizes the correlation coecients between the individual investment behavior measures.

In this study, we compute ten proxies for individual investment behavior: portfolio turnover, trade clustering, disposition eect, leading turnover, forecasting skill, trend chasing, home bias, local bias, lottery-stock preference, and under-diversication. Some of these measures (e.g., lottery-stock preference) are usually seen as investment mistakes, whereas others (e.g., local bias) are often linked to superior information or investment skill (e.g., Ivkovi c and Weisbenner, 2005). What might be an investment mistake for most investors can also be an informed decision for a few skilled investors (Kumar and Korniotis, 2013). For instance, concentrating ones portfolio in a few stocks might be simple under-diversication or might reect superior information about these companies. However, the goal of this study is not to determine whether there are subgroups of investors who can use these behaviors to their advantage but, rather, to look at the average eects of each type of investment behavior to determine the eects of dierent investment

17

Table 4: Descriptive statistics on investment behavior proxies


This table presents descriptive statistics on all investment behavior proxies used in this study. A detailed description of the calculation methods used for each proxy is given in Appendix A and a brief description can be found in Table 3. Mean T urnoverAll T urnoverStocks T urnoverF unds ClusteringAll ClusteringStocks ClusteringF unds DispositionStocks DispositionF unds LeaderShareAll LeaderShareStocks LeaderShareF unds F orecastingAll F orecastingStocks F orecastingF unds T rendChasingF unds,it HomeBiasStocks HomeBiasF unds LocalBiasStocks LocalBiasF unds LotteryP ref N onLotteryP ref N ormV arAll N ormV arStocks N ormV arF unds 0.16 0.08 0.01 0.21 0.17 0.19 3.82 3.57 0.02 0.01 0.00 -0.13 -0.12 0.02 0.31 0.63 0.03 17.60 0.00 5.82 -0.20 0.55 0.60 0.76 Median 0.00 0.00 0.00 0.18 0.10 0.06 1.25 0.01 0.00 0.00 0.00 -0.05 -0.05 0.00 0.23 0.74 0.00 16.96 18.44 -1.00 -0.14 0.51 0.55 0.79 Std. Dev. 0.51 0.26 0.06 0.21 0.20 0.23 19.43 32.11 0.10 0.09 0.05 0.68 0.65 0.65 0.42 0.37 0.10 111.11 126.39 21.37 0.57 0.23 0.24 0.22 P5 0.00 0.00 0.00 0.00 0.00 0.00 -8.71 -48.90 0.00 0.00 0.00 -1.00 -0.99 -0.97 -0.13 0.00 0.00 -171.57 -212.72 -1.00 -1.00 0.22 0.26 0.33 P95 0.96 0.53 0.09 0.61 0.55 0.64 42.76 70.48 0.00 0.00 0.00 0.95 0.93 0.97 1.03 1.00 0.19 199.49 199.95 46.17 0.63 1.00 1.00 1.00

18

behaviors on the average investor. The focus is therefore on the cross-sectional analysis of all investors and we only briey discuss any non-linear relations between performance and behavior while presenting univariate results. The behavioral proxies can be categorized into two groups: The rst consists of those addressing trading behavior (portfolio turnover, trade clustering, disposition effect, leading turnover, forecasting skill, and trend chasing) and the second group focuses on portfolio composition (home bias, local bias, lottery-stock preference, and underdiversication). Turning to the former, we rst construct a measure of monthly portfolio turnover (T urnover) similar to that of Barber and Odean (2000, 2001). One should expect rational investors to trade only if the benets outweigh the costs (cf. Grossman and Stiglitz, 1980). Empirical evidence suggests otherwise. Individual investors frequently trade without achieving higher returns, thus diminishing their net returns (Barber and Odean, 2000). Barber and Odean (2001) attribute this high trading frequency among individual investors to overcondence, which is usually modeled as an unjustied belief in the precision of ones own information (e.g., Kyle and Wang, 1997; Daniel, Hirshleifer, and Subrahmanyam, 1998; Odean, 1998b; Peng and Xiong, 2006). Though the empirical support for the link between miscalibration and trading volume is weak (Glaser and Weber, 2007a; Dorn and Sengmueller, 2009), there is ample evidence that active trading does not benet most investors (e.g., Odean, 1999; Barber et al., 2009; Meyer et al., 2012). Since these studies usually measure the benets and costs of trading by testing whether investors could have achieved higher returns if they had not traded, it is not clear, however, whether there will be any signicant relation between turnover and realized returns in a study such as ours, in which we compare the performance of investors with dierent levels of turnover.

19

Turning to descriptive statistics on the ten investment behavior proxies, we observe that the mean monthly full portfolio turnover in our sample9 is about 16%, which is of the same order of magnitude as the 15% found by Dorn and Sengmueller (2009) for their German investors. Considering that our sample is decidedly more recent than theirs (which runs from 1995 to 2000) and, as French (2008, p. 1552, Fig. 1) demonstrates, that trading volumes have more than doubled since the end of the 1990s, it is not surprising that turnover in our sample is higher. When calculating turnover separately for stocks and mutual funds, the means are substantially lower (8% and 2%, respectively) and reveal that investors trade stocks more actively than they trade funds. In comparison, the mean of 8% for stock turnover also aligns well with the 6% mean in the data set of Barber and Odean (2000) for U.S. discount broker clients. Moreover, in prior studies it has been shown that investors are subject to narrow framing (cf. Kahneman and Lovallo, 1993; Barberis, Huang, and Thaler, 2006). Narrow framing describes an investors tendency to consider investment decisions separately instead of jointly, thus potentially neglecting portfolio eects. To measure the extent of narrow framing Kumar and Lim (2008) suggest to use a variable they call trade clustering. Trade clustering is dened as one minus the ratio of days an investor trades to the investors number of trades. This measure takes on values between zero (all trades on separate days) and one (all trades on the same day). In their sample the mean value of trade clustering is 0.23. The mean clustering measure (Clustering ) for the investors in our sample is 0.21. Thus, in both samples, investors have a strong tendency to separate their trades and seem to be prone to narrow framing.

We winsorize portfolio turnover at 2% since some very extreme outliers are caused by low portfolio values. These outliers are, however, not limited to a certain group of investors but appear almost equally across all investor groups.

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Another intensively discussed aspect of trading behavior is the disposition eect, i.e., the tendency to realize gains rather than losses (Shefrin and Statman, 1985; Odean, 1998a). Prior studies (e.g., Odean, 1998a; Kumar and Lim, 2008; Bailey, Kumar, and Ng, 2011) estimate the disposition eect as the dierence between the proportion of gains realized (PGR) and the proportion of losses realized (PLR). Both proportions are measured as actual sales for a gain/loss relative to the number securities could have been sold for a gain/loss. However, as Feng and Seasholes (2005) point out, this measure is mechanically linked to portfolio characteristics such as the number of securities in a portfolio and can thus lead to biased inferences. We therefore follow recent literature (e.g., Ivkovi c, Poterba, and Weisbenner, 2005; Shumway and Wu, 2006; Nolte, 2012) and employ Cox (1972) proportional hazard models to estimate the disposition eect for each investor. From these models, we obtain each investors propensity to realize gains (PRG) and propensity to realize losses (PRL). This set-up also allows tax considerations to be controlled at the same time. The dierence between PRG and PLR from the hazard models then measures the disposition eect (Disposition). On average, investors in the sample exhibit the disposition eect, with a mean dierence between PRG and PRL of 3.9 for stocks and 3.7 for funds. Although these measures appear similar, their distributions are quite dierent. The disposition eect statistic for stocks is signicantly shifted to the right, with a median well above zero (1.3) and a signicantly higher 95th than 5th percentile in absolute terms, whereas the distribution for funds is centered on zero. This nding indicates that the disposition eect is, on average, more pronounced for stocks than for funds. Finding a disposition eect for funds at all at rst appears to contradict the results of Ivkovi c and Weisbenner (2009), who document a negative relation between cumulative returns on fund holdings and selling probabilities. However, there is a strong dependency of the results on tax considerations. In taxable accounts they nd no disposition eect, whereas for tax-deferred accounts the relation between paper

21

gains and selling probability is shown to be positive. As this paper explicitly controls for tax-motivated trading, the ndings are in accordance with the literature. We also take into account the relative timing of investor trades. Prior literature documents that investors social networks activities inuence their stock market participation (Brown et al., 2008) and trading decisions (Shive, 2010). Ozsoylev et al. (2011) additionally show that investors who are more central to an information network trade earlier than other investors and achieve higher returns, which is plausible, given that certain investment strategies require very quick reactions to new information (Barber et al., 2001). We therefore construct a measure of the degree to which an investor systematically trades before other investors (LeaderShare). For any given investor pair A and B, we count the instances in which A and B trade within 10 days of each other in the same direction. If this happens more than seven times during the sample period and A trades before B at least 75% of the time, all of As trades before those of B are counted into As measure of leading trading. Summing up these transaction volumes for each investor (but avoiding double counting when an investor leads multiple other investors), converting the result into a portfolio turnover measure, and dividing it by regular portfolio turnover yields a percentage measure of leading turnover. The share of leading turnover is generally very low. When all transactions are considered, its mean is only 2% and it drops to 1% and 0% when stocks and funds are considered separately. A further measure is taken from Nicolosi, Peng, and Zhu (2009) that directly proxies for investor trading skill (F orecasting ). To construct this measure, we determine cumulative excess returns on securities purchased for a holding period of 20 trading days starting on the day of purchase. For each investor, we then conduct a monthly one-sided t-test of whether the excess returns on an investors transactions up to month t 2 are signicantly dierent from zero. Subtracting this signicance level from one and multi-

22

plying it by the sign of the majority of excess returns yields our skill measure. It can take on values between -1 (signicantly negative skill) and +1 (signicantly positive skill) and has negative sample means of -0.13 when considering all trades and -0.12 when only considering stock trades. These values are very close to the sample mean of -0.09 of Nicolosi, Peng, and Zhu (2009). The average investor thus appears to be unable to forecast future excess returns, which is consistent with Odeans (1999) nding that stocks investors buy underperform those they sell. For mutual funds, we nd a better forecasting skill of slightly above zero. The nal trading-related measure captures the degree to which an investor engages in trend chasing when buying mutual funds. Sirri and Tufano (1998), Bergstresser and Poterba (2002), and Sapp and Tiwari (2004) all demonstrate that investors tend to prefer funds with higher recent performance. To the extent that mutual fund performance persists (cf. Hendricks, Patel, and Zeckhauser, 1993; Brown and Goetzmann, 1995), this is a sensible approach to mutual fund selection and could lead to higher returns. Whether fund performance does indeed persist is a much debated issue (cf. Carhart, 1997; Kosowski et al., 2006; Fama and French, 2010). Nevertheless, investors in our sample appear to exhibit substantial trend chasing. Following Bailey, Kumar, and Ng (2011), we measure trend chasing as the average prior-year return on funds that investors purchase. Accordingly, we assume that investors treat the mutual fund market as integrated and compare returns in absolute terms across all funds. The mean of this return is 31%, indicating that investors prefer to buy funds that have substantially increased in value before their purchase. In addition, the distribution of pre-purchase returns is strongly positively skewed, meaning that investors avoid funds that have recently lost value. In addition to trade-based measures, we compute four portfolio-based proxies for investment behavior. First, we compute each investors home bias for stocks and funds as

23

the portfolio share of German stocks and the funds investing in German stocks (HomeBias). Since there are signicant benets to international diversication (e.g., Grubel, 1968; De Santis and Gerard, 1997), the portfolio share of home country securities should, rationally, not exceed ones home countrys share of global market capitalization. Yet, in the aggregate, investors exhibit a strong preference for investing in their home country (cf. French and Poterba, 1991; Tesar and Werner, 1995; Lewis, 1999). Investors hold about 63% of their stocks investments in German stocks but only 3% of their fund investments in Germany-focused funds. Given that Germanys share of global market capitalization was about 3% in 2011,10 investors are strongly home biased in stocks but, on average, not home biased in funds. Closely related to home bias is local bias, or home bias at home (Coval and Moskowitz, 1999, p. 2045), which denotes an investors tendency to prefer securities of companies whose headquarter is close to their home. It has been shown that professional investors (Coval and Moskowitz, 1999) as well as individual investors (Ivkovi c and Weisbenner, 2005) exhibit this behavior. In accordance with prior literature, investors in our sample also exhibit local bias for stock investments. On average, they are 18 kilometers closer to the companies in their portfolio than to all the companies in the market portfolio. In relative terms, the portfolio distance is about 94% of the market distance. This is a somewhat smaller eect than the approximately 75% found by Ivkovi c and Weisbenner (2005),11 but this might be due to Germanys signicantly smaller geographical size compared to that of the United States, meaning that in Germany it is simply harder to be far away from the market portfolio. We do not nd an average local bias for funds, however. The nding is in line with the conjecture that local bias is driven
10

The value is based on own calcuation from World Bank data. Raw data are available at http://data. worldbank.org/indicator/CM.MKT.LCAP.CD/countries (accessed January 31, 2013). 11 We manually calculated this value from the mean statistics given in panel C of Table 1 (Ivkovi c and Weisbenner, 2005, p. 273).

24

by superior information, since it is unclear how investors could be better informed about mutual funds by living closer to a fund management company. Kumar (2009) demonstrates that individuals who are more prone to gambling also tend to invest in stocks with lottery-like characteristics (low prices, high idiosyncratic volatility, high idiosyncratic skewness), which substantially reduces their portfolio performance. To measure gambling preference, we compute the excess weight of lottery stocks relative to the share of lottery stocks in the market portfolio. As proxy for the market portfolio we use all stocks that have been traded in our sample. In total, investors have traded in more than 19,000 stocks. On average, investors in our sample appear to exhibit a preference for lottery-like stocks, since the share of these stocks in their portfolios is six times as high as it is in the market. Further evidence on this preference is provided by the excess weight of non-lottery stocks (the opposite of lottery stocks, i.e. stocks with high prices, low idiosyncratic volatility, low idiosyncratic skewness), which is slightly below zero. Note that this need not be the case, since an investor could, in principle, have a positive excess weight on both lottery and non-lottery stocks.12 Finally, we follow Goetzmann and Kumar (2008) and include the normalized portfolio variance as a measure of under-diversication (N ormV ar). It is calculated as the ratio of the portfolio return variance to the average return variance of portfolio securities and takes on values between zero (perfect diversication) and one (perfectly correlated portfolio securities, no diversication). The normalized portfolio variance in our sample is 0.55 for the full portfolio and 0.60 for the stock portfolio. Therefore, investors in our sample are on average not very well diversied. Comparing these values to the literature, we nd that Goetzmann and Kumar (2008) report a value of 57% for stock investments,
12

Suppose, for instance, that lottery stocks represent 5% of market capitalization and non-lottery stocks 50%. If an investor holds two stocks, a lottery stock with a 20% portfolio share and a non-lottery stock with an 80% portfolio share, the investor will have positive excess weights on both types of stocks.

25

which is well in line with our ndings.13 The value for funds is substantially higher (0.76), since each fund is already a diversied investment and the diversication benet of purchasing an additional fund is smaller. Having introduced all our measures of investment behavior, we briey discuss their development over time. Table B.3 in Appendix B illustrates sample means for all measures for the years 2000 to 2011. Most investment behavior measures are quite variable over time. Systematic patterns across all measures are, however, not obvious. The exception is turnover which seems to be dependent on the business cycle. In fact, it was rather stable after the dot-com crisis, but decreased quite substantially in the wake of the subprime nancial crisis (see also Strahilevitz, Odean, and Barber, 2011). Before further analyzing investor-level autocorrelations and cross-correlations of investment behavior measures, we apply two transformations to all these measures. First, similar to Bailey, Kumar, and Ng (2011), we apply a peer-group adjustment. We dene each investors peer group as those investors in the same quintile of portfolio value and trading frequency. For each of these groups we calculate the mean value of the behavior measure and subtract it from all observations in that group. We can thus rule out that mechanical relations between portfolio value, trading frequency, and our behavior measures are driving our results. In addition, we studentize all measures so that all regression coecients will be in terms of standard deviations and thus easy to compare. All subsequent analyses use this transformed version of the behavior measures. From their development over time discussed above, it is apparent that investment behaviors aecting portfolio composition, such as home bias or under-diversication, remain fairly stable over time. Further corroborating evidence of this conjecture is presented in
13

The average is calculated from the last column of panels A and B of Table 1 (Goetzmann and Kumar, 2008, p. 438) by weighting the normalized variances in panel B with the percentage of portfolios in panel A.

26

Table B.2 in Appendix B. In that table, we analyze investor-level autocorrelations of investment behavior proxies for lags of six, 12, and 24 months. The average correlation coecients for the six-month lag are much larger for portfolio-based measures (underdiversication, home bias, local bias, lottery-stock preference) than for trading measures. Trade clustering, forecasting skill, and the disposition eect are also highly correlated, although trade based. However, for these three measures, this high correlation might at least partially reect a mechanical eect, since these measures are constructed using trades from multiple time periods and thus, even if changes occurred from one month to the other, the eect would be curbed and it would hence take a couple of periods until the data would fully reect the change. In general, over longer horizons, the autocorrelations for most behavior proxies signicantly decline, indicating that investors indeed change their behavior over time. Finally, we analyze the cross-correlations of our measures of investment behavior for the full portfolio. The correlation matrix in Table 5 reveals that most biases are correlated with each other. The correlation coecients are mostly below 0.1. Consequently, multicollinearity is not an issue in our in later analyses. Since it is impossible to summarize all correlations, we only highlight a few interesting patterns. Investors with high portfolio turnover tend to invest in lottery stocks and concentrate their portfolios. Investors with high forecasting skills, on the other hand, tend to churn their portfolios less, buy more non-lottery stocks, and exhibit higher local bias. In addition, as found by Kumar and Lim (2008), investors who cluster their trades more (i.e., are less prone to a narrow framing bias) exhibit a lower disposition eect and have better-diversied portfolios.

27

... ...

Table 5: Cross-correlation of bias proxies


This table presents cross-sectional correlations of investment behavior proxies. All the variables have been studentized to meet the normality assumption underlying the signicance test for the correlation coecients. *, **, and *** denote signicance at the 10%, 5%, and 1% levels, respectively.

(1) (1) T urnoverAll (2) ClusteringAll (3) DispositionStocks (4) DispositionF unds (5) LeaderShareAll (6) F orecastingAll (7) T rendChasingF unds (8) HomeBiasStocks (9) HomeBiasF unds (10) LocalBiasStocks (11) LocalBiasF unds (12) LotteryP ref (13) N onLotteryP ref (14) N ormV arAll 1.00

(2) -0.02*** 1.00

(3) -0.01*** -0.07*** 1.00

(4) -0.02*** -0.02*** 0.15*** 1.00

(5) 0.06*** 0.02*** -0.00 -0.01** 1.00

(6) -0.03*** 0.01*** 0.04*** -0.01*** -0.01*** 1.00***

(7) 0.06*** -0.01 -0.04*** -0.04*** -0.08*** -0.01 1.00

(8) 0.02*** -0.04*** 0.07*** 0.04*** 0.01*** -0.03*** -0.04*** 1.00

(9) -0.03*** 0.01*** 0.02*** 0.03*** -0.01*** -0.00*** -0.06*** 0.05*** 1.00***

(10) -0.02*** -0.02*** 0.02*** 0.03*** -0.00 0.02*** -0.02** 0.04*** 0.01*** 1.00

(11) 0.02*** -0.03*** 0.02*** 0.08*** -0.00 0.03*** -0.02*** 0.04*** 0.03*** -0.05*** 1.00

(12) 0.04*** 0.02*** -0.01*** 0.02*** -0.01*** -0.08*** -0.01 -0.17*** -0.01*** -0.04*** -0.01*** 1.00

(13) -0.04*** -0.02*** 0.04*** -0.01* 0.01*** 0.08*** -0.04*** 0.17*** 0.03*** 0.05*** 0.03*** -0.34*** 1.00

(14) 0.12*** -0.02*** -0.00 -0.01* -0.01*** 0.01*** 0.04*** 0.12*** 0.08*** 0.06*** -0.00 0.02*** 0.02*** 1.00

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4.

Investment behavior and portfolio performance


In this section, we present two analyses. We rst briey analyze the univariate relation

between the individual investment behavior proxies and portfolio returns. This approach allows us to link our performance results back to previous research. In addition, it constitutes the benchmark for the second analysis: a multivariate study of the statistical and economic signicance of the eects of investment behavior on portfolio performance, which will allow us to determine, which behaviors have the largest eects on portfolio performance.

4.1. Univariate results


We employ two dierent methods to conduct our univariate analysis. First, we calculate average returns to investor portfolios for each quintile of a given measure of investment behavior. This permits the detection of non-linearities in the behaviorperformance relation. In addition, we conduct univariate OLS-regressions with standard errors clustered at the investor and time level of portfolio returns on the measure of investment behavior without any further risk-adjustment or control variables. Note that in both cases, we measure the investment behavior ex-ante14 . This approach allows for a cautious causal interpretation of the ndings. We also only analyze the relations between investment behavior measures and portfolio returns for the part of the portfolio for which they were constructed. This means, for example, that for the fund portfolio we examine the eect of fund-level but not stock-level home bias on performance of the fund portfolio.
14

Exceptions to this are portfolio turnover, which is measured contemporaneously with returns, and the disposition eect, which is measured using hazard models that exploit the entire time-series data of each investor.

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If we estimated the inuence of stock-level home bias on fund returns, we would in fact be discussing whether investment behavior in one portfolio part positively or negatively aects returns in another part. Although this might be an interesting question for further research, we deem this analysis beyond the scope of this paper. The results of our univariate analyses are reported in Table 6. We nd a negative coecient for portfolio turnover, trade clustering, lottery-stock preference, and underdiversication for the full portfolio as well as for the stock and the fund portfolio. However, the signicance levels for measures of investment behavior are generally higher for the full and the stock portfolio than for the fund portfolio. For both full and stock portfolio, trade clustering, under-diversication and lottery-stock preference are statistically signicant. The coecient for trade clustering is much smaller than the one for the other two measures. In addition, the coecient for turnover is only statistically signicant for the full portfolio. In contrast, there is a positive performance impact of forecasting skill and trend chasing for all three portfolio splits (full, stock and fund portfolio). The coecients on the two variables are again only statistically signicant for the full and the stock portfolios. Turning to the full and stock portfolio only, we also nd positive coecients for home bias, local bias, non-lottery stock preference, the disposition eect, forecasting skill, and trend chasing, though only non-lottery stock preference and stock-level local bias are statistically signicant. The result with respect to home bias is a bit more ambiguous. Whereas fund-level home bias is signicantly positive for the full portfolio, stock-level home bias is not. The quintile sorts of Table 6 reveal that the eect of our investment behavior measures on portfolio returns is not necessarily linear. For portfolio turnover there is no clear structure for the full and stock portfolios, but a U-shape for the fund portfolio. In 30

contrast, for trade clustering, the quintile sorts show a negative trend for the full and stock portfolios, but not for the fund portfolio. A linear trend, albeit positive, is also found for forecasting skill. On average, univariate regressions have shown that investors with stronger lottery-stock exposure realize signicantly lower portfolio returns. This phenomenon appears to be largely driven by the quintile of investors with the highest lottery-stock preference; the rst four quintiles show a small upward trend. A similar pattern results for under-diversication. For local bias the quintile sorts show an upward trend, although not a monotonic one, since the third quintile shows a drop in returns. For home bias the quintiles rst indicate an upward trend, which reverses in highest-quintile of stock-level home bias. Until this point it has been left open whether our results align with existing literature. In the following we will show that they do and in those cases in which they do not, we will briey discuss potential explanations. The eect of turnover on stock portfolio returns is perfectly in line with those of Barber and Odean (2000), who also nd no signicantly negative eect of turnover on gross returns. The same holds true for trade clustering. The negative relation we nd is in line with the results of Kumar and Lim (2008), who also nd investors who exhibit less narrow framing to underperform narrow-framing investors when raw portfolio returns are used as the performance benchmark. The results for lottery-stock preference also echo those of Kumar (2009), in that investors with stronger lottery-stock exposure realize signicantly lower portfolio returns. The positive return to stock-level local bias echoes the results of Coval and Moskowitz (2001) and Ivkovi c and Weisbenner (2005). Given the information-based explanations proposed for local bias, it seems sensible that fund-level local bias is unrelated with returns. Whereas literature generally assumes signicant benets to international diversication (e.g., Grubel, 1968; De Santis and Gerard, 1997), our results rather indicate a positive relation between home bias and performance. Among the likely reasons for this result is the performance of of 31

CDAX (the composite index of the German stock market), which outperformed the MSCI World during the sample period. Finally, at rst sight our results on the disposition eect seem to be at odds with the detrimental eect of the disposition eect suggested in the literature (cf. Odean, 1998a). Yet, their ndings on the costs of the disposition eect are based on an opportunity cost argument. These papers calculate the dierence between the return they realize on the stocks they sell and keep and the return they could have realized, if they had behaved in the opposite way. However, this approach does not necessarily allow for conclusions about the returns investors with and without a disposition eect realize.15 In essence, it seems most likely that the cross-sectional performance heterogeneity with respect to the disposition eect might be due to other performance-relevant behaviors being incidentally related to the disposition eect measure, as Table 5 reveals. For example, the stock-level disposition eect is empirically positively correlated with forecasting skill, home bias, and local bias, which are, in turn, all positively associated with returns. The nding of a positive relation between returns and forecasting skill in the univariate regression setting, is in line with the idea of performance persistence among individual investors (Coval, Hirshleifer, and Shumway, 2005) and suggests that investors have different levels of skill. The forecasting skill eect appears to be somewhat stronger for
15

For the disposition eect to make a dierence in the cross-sectional performance of investors, restrictive conditions need to be met. First, the disposition eect can only make a dierence if security prices do not follow a Markov process; in other words, there needs to be momentum or performance persistence in the market. Given this precondition, one possibility would be that non-disposition eect investors hold portfolios that are very similar (e.g., in terms of share of winners) to those of disposition-eect investors before the latter sell a winner. In this case, non-disposition eect investors would outperform disposition eect investors, on average, since winning stocks are more likely to continue to be winning stocks due to the prevalence of price momentum. For a single pair of (disposition and non-disposition eect) investors, the two portfolios even need to be identical just before the winning security is sold to create a dierence with certainty. An outperformance of disposition-eect investors, on the other hand, can arise if these investors hold more winners than non-disposition eect investors. However, by using a hazard model to measure the disposition eect instead of the ratio-based approach proposed in Odean (1998a) we prevent mechanical relations between the number of winners in a portfolio and the disposition eect from inuencing our results.

32

stocks than for funds, which is plausible, given that investors should have an easier time procuring value-relevant information about an individual stock than about a mutual fund. Trend chasing in mutual fund investments, on the other hand, only has a positive eect for the full portfolio but not for the fund portfolio. This seems at odds with the literature arguing rather in favor of performance persistence of mutual funds (e.g., Brown and Goetzmann, 1995; Kosowski et al., 2006; Fama and French, 2010). We believe that the positive eect for the full portfolio may just be a proxy for the fund share in the full portfolio regressions, given that investors achieve better returns on their fund investments. The non-existence of an eect for the fund portfolio may simply be a sign that individual investors implement such a strategy incorrectly, although research suggests such a strategy might be benecial (Meyer, Jabs, and Hackethal, 2013). All in all, our univariate results align well with existing literature. This existing literature has so far identied a particular behavior and has then analyzed how this behavior is related to performance. In the next section, this paper will test which of the ten dierent measures of individual investment behavior really matter for explaining individual investor investment performance in a multivariate regression setting.

33

Table 6: Returns for investment-behavior-sorted portfolios and univariate regression coecients


This table presents equal-weighted average monthly portfolio excess returns over the three-month money-market rate of investors, sorted into quintiles according to dierent proxies for investment behavior. The regression coecients are from a univariate ordinary least squares (OLS) regression of portfolio excess returns on each individual investment behavior measure. The measures are peer-group adjusted (by subtracting the mean value for the portfolio size and trading frequency quintile to which the investor belongs) and standardized. The regression standard errors are adjusted for two-way clustering on the investor and time dimensions. *, **, and *** denote signicance at the 10%, 5%, and 1% levels, respectively. Q1 Panel A: Full portfolio T urnoverAll,it ClusteringAll,it DispositionStocks,it DispositionF unds,it LeaderShareAll,it F orecastingAll,it T rendChasingF unds,it HomeBiasStocks,it1 HomeBiasF unds,it1 LocalBiasStocks,it1 LocalBiasF unds,it1 LotteryP refit1 N onLotteryP refit1 N ormV arAll,it1 Panel B: Stock portfolio T urnoverStocks,it ClusteringStocks,it DispositionStocks,it LeaderShareStocks,it F orecastingStocks,it HomeBiasStocks,it1 LocalBiasStocks,it1 LotteryP refit1 N onLotteryP refit1 N ormV arStocks,it1 Panel C: Fund portfolio T urnoverF unds,it ClusteringF unds,it DispositionF unds,it LeaderShareF unds,it F orecastingF unds,it T rendChasingF unds,it HomeBiasF unds,it1 LocalBiasF unds,it1 N ormV arF unds,it1 -0.0000 -0.0003 -0.0015 -0.0023 -0.0023 -0.0018 -0.0022 -0.0024 -0.0014 -0.0008 -0.0011 0.0020 0.0006 -0.0017 -0.0020 -0.0027 -0.0005 -0.0006 -0.0040 -0.0006 -0.0019 -0.0047 -0.0005 -0.0030 -0.0010 -0.0023 -0.0009 -0.0026 -0.0005 -0.0011 . -0.0036 -0.0009 0.0002 -0.0005 -0.0012 -0.0008 -0.0007 -0.0026 -0.0076 -0.0006 -0.0014 -0.0020 -0.0022 -0.0012 -0.0002 0.0000 -0.0001 -0.0001* 0.0005* -0.0005 -0.0002 -0.0001 -0.0003 -0.0061 -0.0030 -0.0032 -0.0042 -0.0064 -0.0107 -0.0056 -0.0069 -0.0138 -0.0031 -0.0050 -0.0044 -0.0075 -0.0012 -0.0053 -0.0068 -0.0049 -0.0030 -0.0101 -0.0026 0.0011 -0.0061 -0.0079 -0.0155 -0.0048 -0.0034 -0.0089 -0.0044 -0.0034 -0.0035 -0.0113 -0.0061 -0.0074 -0.0496 -0.0047 -0.0030 -0.0046 -0.0011 -0.0016 -0.0063 -0.0059 -0.0062 -0.0041 -0.0082 -0.0041 -0.0054 -0.0038 -0.0104 -0.0016 -0.0092 -0.0004 -0.0009*** 0.0008*** 0.0001 0.0009*** 0.0024* 0.0007*** -0.0060*** 0.0057*** -0.0033*** -0.0039 -0.0015 -0.0026 -0.0041 -0.0056 -0.0055 -0.0028 -0.0054 -0.0039 -0.0054 -0.0047 -0.0059 -0.0069 -0.0039 -0.0061 -0.0045 -0.0050 -0.0045 0.0002 -0.0056 -0.0019 -0.0059 -0.0065 -0.0038 -0.0041 -0.0028 -0.0084 -0.0029 -0.0038 -0.0045 -0.0060 -0.0102 -0.0116 -0.0040 -0.0068 -0.0037 -0.0039 -0.0057 -0.0058 -0.0041 -0.0036 -0.0033 -0.0022 -0.0051 -0.0067 -0.0079 -0.0162 -0.0033 -0.0088 -0.0031 -0.0049 -0.0045 -0.0048 -0.0014 -0.0022 -0.0048 -0.0065 -0.0050 -0.0043 -0.0056 -0.0087 -0.0038 -0.0028 -0.0053 -0.0042 -0.0039 -0.0043 -0.0089 -0.0022 -0.0080 -0.0010*** -0.0008*** 0.0003* 0.0000 -0.0001 0.0009*** 0.0007*** 0.0005 0.0007*** 0.0005** 0.0000 -0.0042*** 0.0026*** -0.0021*** Q2 Q3 Q4 Q5 Reg. coecient

34

4.2. Multivariate results


In the main analysis, we use multivariate regressions to estimate the return premiums or penalties associated with dierent types of investment behavior. In doing so, we follow classical papers from the asset pricing literature (e.g., Fama and French, 1992). We rst estimate portfolio sensitivities (our investment behavior measures) to the factors for which premiums are sought and then run a regression of returns on sensitivities to determine these premiums. We utilize the full information provided by our investor panel by conducting a pooled cross-sectional time-series regression. Using pooled cross-sectional time-series regressions has at least two major advantages compared to just using average returns per investors (e.g., Bailey, Kumar, and Ng, 2011). First, we are able to use ex-ante measures of investment behavior for most of our investment behaviors (at the end of month t 1) instead of contemporaneously estimating investment behavior and returns, which better allows for a causal interpretation of results. Second, our tests should be considerably more precise as investors learn over time and adapt their investment behavior (Feng and Seasholes, 2005; Nicolosi, Peng, and Zhu, 2009). When estimating the impact of investment behavior measures, three econometric issues arise that need to be addressed. First, because some investment behavior measures are severely persistent at the investor level and there is evidence of performance persistence among retail investors (Coval, Hirshleifer, and Shumway, 2005), there is likely to be a high degree of auto-correlation in the regression residuals. In addition, investors share exposures to similar asset markets (especially the German stock market, due to the high degree of home bias), which might also cause cross-sectional dependence. A possible solution to this problem would be to use a FamaMacbeth (1973) regression design, which controls for cross-sectional dependence, and to augment it by applying a NeweyWest (1987) correction to the standard error estimates to reect investor-level 35

auto-correlation. However, as Petersen (2009) demonstrates, FamaMacbeth standard errors are likely to be biased when auto-correlation is present and the NeweyWest correction might not be sucient. We therefore employ standard errors clustered on the investor and time dimensions (cf. Cameron, Gelbach, and Miller, 2011), which are shown to deliver unbiased estimates even in the presence of severely auto-correlated and crosssectionally dependent data (Petersen, 2009). For comparison, however, we also run the regression analyses for the full portfolio using a FamaMacbeth regression with Newey West-adjusted standard errors (12 lags) and nd results that are qualitatively comparable to those reported below. Furthermore, multicollinearity might also be an issue due to the high number of independent variables. We test for the presence of multicollinearity by using variance ination factors. The variance ination factors across the regressions are all below two. Given that the critical value would be ve, we conclude that multicollinearity is not a problem. Second, to estimate the full pooled cross-sectional and time-series regression, dening a consistent strategy towards missing data is important. Because we use many measures for investment behavior, we nd that at least one is very frequently missing for any given investor. If we restrict our sample to only those investors for whom all measures can be computed, we would not only end up with a rather small sample but might have also introduced a selection bias. This is because the variables Clustering and Disposition will be missing in particular for those investors who do not trade very often. Reducing the sample by these investors would thus bias our sample towards more frequent traders. We therefore assume that investors for whom a specic investment behavior proxy cannot be estimated do not exhibit this behavior. As Appendix B documents, this assumption does not change the univariate relation between behavior and portfolio performance for any of the measures, except for the stock-level disposition eect, which loses its univariate signicance. Testing whether this loss of signicance also carries over to the multiple 36

regression framework, we re-estimate our regression model with and without the missing data adjustment for the disposition eect and do not nd any change in results. The strategy for dealing with missing data is thus not aecting our results in the multivariate regressions. Third, all regressions include a set of control variables that is meant to capture any spurious eects that might bias our results. We control for stock and fund share when using full portfolio returns to prevent portfolio composition from driving our results. Additionally, we control for sociodemographics like age, gender, and education. As dependent variables, use three dierent measures of performance. First, we use portfolio excess returns over the risk-free rate, which is assumed to be the three-month money market rate. In this regression, we also include portfolio betas as additional controls to ensure that cross-sectional dierences in risk exposure are not aecting our results. As a second measure we use monthly four-factor alphas, which are computed as outlined above. These already take into account dierences in risk exposure. Finally, we also use monthly Sharpe ratios, which provide a rather dierent type of risk adjustment and might therefore lead to dierent conclusions. Regression results are presented in Table 7.

37

Table 7: Multivariate analysis of investment behavior and portfolio performance


This table presents the results from OLS regressions of monthly portfolio performance measures on investment behavior measures and control variables. The rst column reports the results for monthly portfolio excess returns over the risk-free rate (proxied for by the three-month money market rate). The second column reports the results for portfolio four-factor alphas. These alphas are constructed by rst computing the average of beginning-of-month and end-of-month holdingsbased portfolio betas on the RMRF, SMB, HML, and MOM factors. Multiplying each beta with the realized factor premium that month and subtracting these expected returns from the actual portfolio return then gives the four-factor alphas. The third column reports the results for monthly Sharpe ratios, calculated as the ratio of the mean daily return and its standard deviation each month. The regression standard errors (in parentheses) are adjusted for two-way clustering at the investor and time levels (cf. Cameron, Gelbach, and Miller, 2011; Petersen, 2009). All variables are dened in Table 3 and all investment behavior proxies are peer-group adjusted (by subtracting the mean in each investors portfolio size and trading frequency quintile) and standardized. *, **, and *** denote signicance at the 10%, 5%, and 1% levels, respectively.

Returns Panel A: Entire portfolio T urnoverAll,it ClusteringAll,it DispositionStocks,it DispositionF unds,it LeaderShareAll,it F orecastingAll,it T rendChasingF unds,it HomeBiasStocks,it1 HomeBiasF unds,it1 LocalBiasStocks,it1 LocalBiasF unds,it1 LotteryP refit1 N onLotteryP refit1 N ormV arAll,it1 RM RF,CDAX,it1 SM B,CDAX,it1 HM L,CDAX,it1 M OM,CDAX,it1 Sexi Agei M arriedi RiskClassi HasP hDi -0.0001 (0.0002) -0.0012*** (0.0003) 0.0001 (0.0001) -0.0002*** (0.0001) -0.0001 (0.0001) 0.0002 (0.0001) -0.0002 (0.0003) 0.0010 (0.0007) -0.0007** (0.0003) 0.0000 (0.0002) 0.0000 (0.0001) -0.0024*** (0.0004) 0.0009 (0.0006) -0.0012*** (0.0003) -0.0053 (0.0035) -0.0082*** (0.0027) 0.0128*** (0.0038) -0.0021 (0.0067) -0.0008 (0.0008) -0.0000 (0.0000) -0.0000 (0.0002) -0.0003 (0.0003) 0.0001 (continued)

Alphas

Sharpe ratios

-0.0001 (0.0002) -0.0008*** (0.0002) 0.0001 (0.0001) 0.0000 (0.0001) -0.0000 (0.0001) 0.0002* (0.0001) 0.0002 (0.0002) -0.0003 (0.0007) -0.0002 (0.0002) 0.0001 (0.0001) 0.0000 (0.0001) -0.0030*** (0.0004) 0.0010** (0.0004) -0.0015*** (0.0004)

-0.0002 (0.0006) -0.0021*** (0.0007) 0.0003 (0.0003) -0.0003 (0.0004) 0.0001 (0.0004) 0.0015*** (0.0005) -0.0018* (0.0011) 0.0031 (0.0021) -0.0022* (0.0013) 0.0008* (0.0004) -0.0000 (0.0003) -0.0059*** (0.0010) 0.0068*** (0.0017) -0.0042*** (0.0011)

-0.0002 (0.0004) -0.0000 (0.0000) 0.0001 (0.0002) -0.0001 (0.0002) 0.0003

-0.0036* (0.0022) -0.0000 (0.0001) -0.0003 (0.0007) -0.0008 (0.0008) 0.0002

38

(continued) IsGermani Experienceit1 P ortV alit1 OptionShareit1 W arrantShareit1 StockShareit1 F undShareit1 Intercept N R2 (0.0005) -0.0009 (0.0007) 0.0000 (0.0000) 0.0018** (0.0008) -0.0001 (0.0097) -0.0018 (0.0054) -0.0067* (0.0038) 0.0037 (0.0025) -0.0115* (0.0068) 475,087.00 0.02 (0.0004) -0.0002 (0.0006) -0.0000 (0.0000) 0.0011*** (0.0004) -0.0181*** (0.0059) -0.0063** (0.0025) -0.0058*** (0.0022) -0.0001 (0.0018) -0.0086* (0.0047) 474,943.00 0.01 (0.0015) -0.0020 (0.0019) 0.0000 (0.0000) 0.0076*** (0.0022) -0.0215 (0.0240) 0.0021 (0.0199) -0.0205 (0.0129) 0.0338** (0.0144) -0.0417** (0.0194) 476,434.00 0.01

Panel B: Stocks in portfolio T urnoverStocks,it ClusteringStocks,it DispositionStocks,it LeaderShareStocks,it F orecastingStocks,it HomeBiasStocks,it1 LocalBiasStocks,it1 LotteryP refit1 N onLotteryP refit1 N ormV arStocks,it1 RM RF,CDAX,it1 SM B,CDAX,it1 HM L,CDAX,it1 M OM,CDAX,it1 Sexi Agei M arriedi RiskClassi HasP hDi IsGermani Experienceit1 0.0002 (0.0003) -0.0010*** (0.0002) 0.0002** (0.0001) -0.0002 (0.0002) 0.0004** (0.0002) 0.0019 (0.0012) 0.0002 (0.0002) -0.0036*** (0.0006) 0.0019* (0.0010) -0.0028*** (0.0004) -0.0056 (0.0042) -0.0046 (0.0030) 0.0098*** (0.0033) -0.0006 (0.0067) -0.0014 (0.0010) -0.0000 (0.0000) -0.0000 (0.0002) -0.0004 (0.0003) 0.0012** (0.0006) -0.0014** (0.0007) 0.0000 (continued) 0.0002 (0.0002) -0.0009*** (0.0002) 0.0000 (0.0001) -0.0001 (0.0001) 0.0003** (0.0002) -0.0001 (0.0009) 0.0001 (0.0001) -0.0028*** (0.0005) 0.0010* (0.0005) -0.0014*** (0.0003) 0.0006 (0.0006) -0.0016** (0.0006) 0.0003 (0.0003) 0.0002 (0.0003) 0.0015*** (0.0005) 0.0056* (0.0029) 0.0007* (0.0004) -0.0068*** (0.0015) 0.0093*** (0.0021) -0.0081*** (0.0016)

-0.0007 (0.0005) -0.0000** (0.0000) 0.0003 (0.0003) -0.0001 (0.0002) 0.0007 (0.0005) -0.0002 (0.0006) -0.0000

-0.0049** (0.0022) -0.0001 (0.0001) -0.0007 (0.0006) -0.0013** (0.0006) 0.0024* (0.0013) -0.0034* (0.0018) 0.0000

39

(continued) P ortV alit1 Intercept N R2 (0.0000) 0.0023* (0.0012) -0.0184* (0.0101) 411,905.00 0.01 (0.0000) 0.0016*** (0.0005) -0.0152*** (0.0056) 412,661.00 0.01 (0.0000) 0.0075*** (0.0024) -0.0455** (0.0200) 411,920.00 0.01

Panel C: Funds in portfolio T urnoverF unds,it ClusteringF unds,it DispositionF unds,it LeaderShareF unds,it F orecastingF unds,it T rendChasingF unds,it HomeBiasF unds,it1 LocalBiasF unds,it1 N ormV arF unds,it1 RM RF,CDAX,it1 SM B,CDAX,it1 HM L,CDAX,it1 M OM,CDAX,it1 Sexi Agei M arriedi RiskClassi HasP hDi IsGermani Experienceit1 P ortV alit1 Intercept N R2 -0.0003* (0.0002) -0.0000 (0.0001) 0.0000 (0.0001) -0.0001* (0.0001) 0.0005** (0.0002) 0.0003 (0.0003) -0.0007** (0.0003) -0.0002** (0.0001) 0.0010** (0.0004) -0.0029 (0.0041) -0.0231** (0.0092) 0.0278** (0.0129) -0.0127 (0.0217) -0.0005 (0.0007) -0.0000 (0.0000) 0.0002 (0.0002) 0.0004** (0.0002) -0.0005 (0.0004) 0.0003 (0.0005) 0.0000 (0.0000) -0.0001 (0.0008) 0.0064 (0.0064) 267,929.00 0.03 0.0001 (0.0001) 0.0001 (0.0001) 0.0000 (0.0000) -0.0001** (0.0001) 0.0002 (0.0002) 0.0003 (0.0002) -0.0002 (0.0002) -0.0001 (0.0000) -0.0002 (0.0004) -0.0017* (0.0009) 0.0008 (0.0009) 0.0001 (0.0004) -0.0007* (0.0003) 0.0034*** (0.0011) -0.0021* (0.0012) -0.0001 (0.0011) -0.0003 (0.0004) -0.0032** (0.0014)

-0.0001 (0.0004) 0.0000 (0.0000) -0.0001 (0.0001) 0.0003** (0.0001) -0.0000 (0.0002) -0.0002 (0.0003) 0.0000 (0.0000) -0.0002 (0.0005) 0.0015 (0.0051) 266,272.00 0.00

-0.0023 (0.0031) -0.0002** (0.0001) 0.0020* (0.0012) 0.0021* (0.0012) -0.0021 (0.0024) 0.0007 (0.0028) -0.0000 (0.0000) 0.0039 (0.0034) 0.0044 (0.0280) 267,883.00 0.00

40

The results from Table 7 largely mirror those from the univariate analyses, as the signs of the coecients are mostly unaltered. In contrast, the signicances change. Only behaviors associated with lower returns retain their statistical signicance. The eects of the dierent measures of investment behavior are rather similar for the full and stock portfolios, but tend to dier for the fund portfolio. The cross section of returns is also not very well explained by the measures of investment behavior discussed in the literature, as can be inferred from the small R2 values in all regressions and the statistically signicant intercepts in the stock portfolio regressions. To further investigate this issue, we run two additional regressions using full portfolio excess returns (not tabulated): one using only investment behavior measures and one using investment behavior measures and portfolio betas. The R2 in the rst regression is 0.5% while the R2 in the second one is 1.5%, indicating that cross-sectional dierences in risk exposure explain twice as much variance in returns as our investment behavior measures. If we employ FamaMacbeth regressions (not tabulated) the average R2 -values of the individual cross-sectional regressions are much higher but the relative importance of portfolio betas in explaining performance is still much higher than that of investment behavior measures. Turning to the individual measures, we nd that portfolio turnover, which was significantly negatively associated with returns in the univariate analysis, is no longer significantly related to performance for the full portfolio. The univariate result thus appears to be a product of the correlation between portfolio turnover and stock share. In other words, investors with a higher share of single stocks in their portfolios have both higher turnover and lower returns (the latter is apparent from Table 2). If this correlation is removed by controlling for the stock share, we obtain the result of Barber and Odean (2000) that turnover is not signicantly related to gross returns. This nding does not hold for the fund portfolio, however, where higher turnover already leads to lower returns and Sharpe ratios on a gross basis. 41

As in the univariate analysis, lottery-stock preference, under-diversication, and trade clustering are signicantly negatively associated with portfolio performance for the full and stock portfolios. Their eects are independent of the performance measure used. It is therefore important to identify the reasons why these three behaviors might lead to inferior portfolio performance relative to other investors. Kumar (2009) empirically demonstrates that portfolios of lottery stocks (constructed using historical price and return data) achieve lower (risk-adjusted) returns than the portfolios of other stocks. Private investors with no special skill at investing in such stocks can then be expected to realize lower returns than their peers who do not buy these stocks. Kumar (2009) does not provide a theoretical rationale for why such stocks underperform. However, current research (Ang et al., 2006, 2009) documents the socalled idiosyncratic volatility puzzle, i.e., that stocks with high levels of idiosyncratic volatility achieve relatively lower returns. One potential explanation is that these stocks provide a hedge against increases in market-level volatility16 . Investors would then be willing to pay a premium for these stocks, resulting in lower returns (Chen and Petkova, 2012). Another potential explanation is that stock-level idiosyncratic volatility predicts idiosyncratic skewness of returns (Boyer, Mitton, and Vorkink, 2010). If investors have prospect-theory preferences, they tend to value positive skewness (due to the probability weighting features of prospect theory), causing such securities to be overpriced and to subsequently realize low returns (Barberis and Huang, 2008). The eect of diversication on performance is, however, harder to explain. From a theoretical ex ante point of view, investors with less diversied portfolios depart from the mean-variance ecient frontier. However, they could do this in any direction. They
16

The argument here is that increases in aggregate volatility are usually accompanied by lower market returns, which represents a reduction in investment opportunities. Stocks that perform well when aggregate volatility increases then provide a form of insurance against this eect.

42

could have the same expected returns at a higher level of risk, higher expected returns at a higher level of risk, or lower expected returns at a lower level of risk (though never the best trade-o between expected returns and risk). It is therefore not immediately clear why under-diversication should be associated with lower returns even in the long-run. Goetzmann and Kumar (2008) hypothesize that better-diversied investors also have better stock-picking skills. The dierence in performance would then be caused by the dierence in skill and therefore eectively unrelated to diversication. Since we explicitly control for at least a short-term measure of security selection skills (F orecasting ) and include proxies for investor sophistication, this explanation might not apply in the context of this paper. An alternate way to give meaning to this result would be as follows. The mean short-term investment skill in our sample is negative, which is in line with other research on individual investors abilities (e.g., Meyer et al., 2012). It may therefore be that better-diversied investors simply diversify away their lack of skill. As hard as it is to always be right, it should also be hard to always be wrong. Less-diversied investors then suer more from the mistakes they make and realize lower returns than their better-diversied counterparts without needing to be substantially less skilled. Like Kumar and Lim (2008), we cannot oer a clear rationale why trade clustering is associated with lower returns. Since trade clustering is meant to measure the absence of narrow framing, investors who cluster their trades should theoretically be more rational and skilled and consequently their returns should be higher. Yet, the opposite seems to be true. They do not achieve better (risk-adjusted) performance. We can, however, oer the data-based conjecture that a large part of the eect might be driven by the superior returns of buy-and-hold investors. By denition, buy-and-hold investors would appear to not cluster their trades at all since they trade very infrequently. We control for these buy-and-hold investors by including a dummy identifying investors who did not trade more than twice during the last 12 months. In the regressions using returns and 43

Sharpe ratios, this dummy is positive and strongly statistically signicant. However, in the alpha regressions it is not signicant. In both regressions the variable Clustering , turns insignicant. These results are consistent with the view that the negative relation between portfolio performance and trade clustering is mainly driven by higher returns of buy-and-hold investors. For the fund portfolio, the eect of under-diversication on performance depends on the performance measure used. If raw returns are used, N ormV ar is positively associated with performance, implying that investors who select less funds or more correlated funds also select better-performing funds. This result does not hold, however, when fourfactor alphas are used to measure performance. For Sharpe ratios, the opposite holds true: Higher portfolio concentration leads to lower Sharpe ratios, since the variability of returns increases with fewer funds or more correlated funds. Trade clustering is positively correlated with performance and even signicantly so if performance is measured using four-factor alphas. The investment behavior measures that are positively associated with performance in the univariate analysis tend to loose their statistical signicance. In particular, stocklevel home bias is only signicantly positively related to stock portfolio performance for Sharpe ratios. This implies that the performance eect of home bias does not seems to stem from superior information or from investors having better skills when investing domestically as Dvorak (2005) implies, but rather from the comparatively higher returns on German stocks when compared to broadly diversied developed markets benchmarks during the sample period. If a risk adjustment is used that takes this outperformance into account, the eect becomes insignicant. Similarly, the eect of stock-level local bias depends on the risk adjustment, since it is only signicant for Sharpe ratios. Fund-level

44

home bias, on the other hand, is now generally negatively associated with performance, although not always statistically signicant. Findings for the disposition eect have also become considerably weaker. Recall that we only estimate the impact of the stock-level disposition eect on full and stock-portfolio performance. Likewise, we only investigate the impact of the fund-level disposition eect on full and fund-portfolio performance. We nd that the stock-level disposition eect is not signicant for the full portfolio. In contrast, we do nd a signicant positive eect on the stock portfolio performance if portfolio returns are used. Using alphas or Sharpe ratios as performance indicators there are no signicant eects. For the fund-level disposition eect there is a signicantly negative eect on full portfolio returns (though not on Sharpe ratios and alphas). There are, however, no eects on any performance metric for the fund portfolio. Similarly, the results for forecasting skill are weaker for the full portfolio and only signicant for Sharpe ratios. However, for the stock portfolio, higher forecasting skill leads to higher portfolio performance, regardless of the performance measure. For the fund portfolio, the eect of forecasting skill depends on the performance measure. It is insignicant for four-factor alphas, which suggests investors with higher forecasting skills buy riskier funds but not necessarily better funds. In sum, the picture for forecasting skill is consistent with an information-based explanation, since its eect is strongest for single stocks, where information acquisition and processing skill should play the largest role in determining investment success. Finally, the coecient for trend chasing in mutual funds is signicantly negative for Sharpe ratios in the full and the fund portfolio. By construction this measure does not apply to the stock portfolio. This result suggests that the positive coecient on the full

45

portfolio documented in the univariate analysis was driven by the share of funds in the portfolio. Having established which investment behaviors lead to relatively better or worse performance among individual investors, the next question to answer is the one about the economic benets of mitigating these investment behaviors. Two dierent perspectives on this issue can be taken. On the one hand, it is relevant to determine how much can be gained from a gradual reduction of the behavior. Additionally, since complete elimination of all these behaviors appears feasible and is indeed achieved by some investors, it is also of interest to estimate the performance impact of doing so. The data is readily available in the form of coecients from the portfolio return regressions reported in Table 7. These coecients give the change in monthly portfolio excess returns associated with a one standard deviation change in the behavior relative to the sample mean and can be used to calculate three metrics presented in Table 8. First, we report the annualized negative coecients from the full portfolio regression above, which are equal to the eect of reducing the behavior by one standard deviation. Second, we report the annualized return change associated with decreasing a specic behavior by 10% relative to the sample mean. This approach takes into account that the behavior proxies have very dierent dispersions and thus very dierent standard deviations. Finally, we calculate the annualized change in portfolio returns associated with going from the sample mean of a specic behavior to not exhibiting this behavior at all. Doing so provides an estimate of how much the average investor loses from this behavior.

The rst column of Table 8 reveals that the priority of reducing certain behaviors depends on the assumed unit of change. When standard deviations are used, portfolio returns are strongly aected by lottery-stock preference (3.2%) and less so by underdiversication (0.8%). When using a 10% increase as the unit of change, this ranking 46

Table 8: Annualized performance impact of investment behavior


This table presents three measures of return premiums or penalties associated with various proxies for investment behavior. The rst measure is the performance eect associated with decreasing a certain investment behavior by one standard deviation. It is estimated using the annualized coecient from the regression of full portfolio returns on the behavior proxies, portfolio betas, and control variables reported in Table 7. Since these standard deviations dier greatly across measures, the next column reports the annualized change in portfolio return associated with a 10% decrease in the behavior with respect to the sample mean. The last column reports the hypothetical return gain associated with eliminating the behavior altogether. Mean - X - 1 Std. Dev. T urnoverAll,it LeaderShareAll,it HomeBiasStocks,it1 HomeBiasF unds,it1 LocalBiasStocks,it1 LocalBiasF unds,it1 ClusteringAll,it LotteryP refit1 N onLotteryP refit1 DispositionStocks,it DispositionF unds,it N ormV arAll,it1 F orecastingAll,it T rendChasingF unds,it 0.0042 0.0014 -0.0069 -0.0023 -0.0004 0.0002 0.0123 0.0320 -0.0049 -0.0008 0.0008 0.0077 -0.0039 -0.0063 - 10% 0.0002 0.0001 -0.0057 -0.0006 -0.0001 0.0000 0.0021 0.0027 -0.0008 -0.0001 0.0001 0.0042 -0.0003 -0.0018 mean 0 0.0020 0.0008 -0.0573 -0.0062 -0.0006 0.0000 0.0213 0.0331 -0.0188 -0.0013 0.0005 0.0418 0.0034 -0.0109

almost reverses, with under-diversication (0.4%) now yielding the larger improvement. The last column of Table 8 also indicates that the average investor suers most from under-diversication. The mean investor has 4.2% lower annual portfolio returns than a fully diversied investor. For lottery-stock preference this dierence is 3.3%. The other behavior measures are associated with rather small changes in average portfolio returns, with the notable exceptions of home bias (-5.5%) and nonlottery-stock preference (1.9%), but these tend to be statistically insignicant in the regressions above. An additional analysis presented in Table B.9 in the Appendix may put these gures into perspective. After all, it is important to establish that performance dierences between investors are large enough to allow for such sizable premiums on eliminating certain investment behaviors. We do this by rst sorting investors into quintiles on a combined measure of all investment behaviors. We construct this combined measure by adding up all (standardized) behavior proxies negatively associated with returns in the 47

regression in Table 7 and subtracting all measures positively associated with returns. For all three performance measures, the results show a monotonically decreasing trend for these behavior quintiles. In addition, the annualized dierences in performance between the rst and fth quintile are large: 8.1% for returns, 6.1% for alphas, and 5.5% for Sharpe ratios. All in all, dierences in investment behavior are therefore associated with large dierences in performance. It is hence plausible that the premiums discussed above can be attained by eliminating or reducing the investment behaviors in question. Finally, note that even the quintile comprising the least-biased investors still realizes negative gross returns and alphas. Now that under-diversication and lottery-stock preference have been established as having the strongest negative eects on portfolio performance, two follow-up issues are addressed. First, there might be some investor groups that suer more from these biases than others. We therefore augment the regressions in Table 7 by including interaction terms between under-diversication or lottery-stock preference and investor demographics. These regressions (not tabulated) provide some evidence that under-diversication is especially detrimental to the performance of men and investors with a higher self-assessed risk tolerance. Interestingly, the coecients of the original variable without interactions (i.e., when the interacting variable is held at zero) becomes insignicant, which suggests that the eects of under-diversication might be mainly driven by these investor groups. Lottery-stock preference, on the other hand, appears not to be particularly detrimental to a specic group of investors, but rather aects all investors. Second, there is the possibility that investors whose behaviors leads to lower performance simultaneously suer an increase in diversiable portfolio risk. Investors would then not only earn lower rewards but also take on more risk to obtain them. To investigate this issue, we run a regression similar to those in Table 7, using idiosyncratic portfolio

48

volatility (measured as the standard deviation of the residuals from the regressions used to compute portfolio betas) as the dependent variable. The results presented in Table B.5 support this conjecture. Lottery-stock preference and under-diversication both lead to signicantly higher diversiable portfolio risk. There are also investment behaviors that reduce diversiable portfolio risk. Investors with stock-level home or local bias also have lower idiosyncratic risk. This nding is not simply due to better regression ts when using a German performance benchmark, because results do no change if the MSCI World is used as the benchmark.17 In addition, investors with higher forecasting skills have lower idiosyncratic portfolio risk, supporting forecasting skill as a general measure of investing skill.

5.

Further analyses and robustness checks


In order to ensure the robustness of our ndings, we address four issues in this section.

The rst is testing whether our results are driven by play-money accounts, the second is using an alternative performance benchmark. Thirdly, we check if our conclusions are qualitatively altered once we use net instead of gross returns and nally, we also test whether our conclusion changes if we use alternative denitions proposed in the literature for some of our variables. In sum, our results are shown to be robust. We also check whether our missing data strategy aects our results and nd that it does not. For the sake of brevity, we refer to Appendix B, which provides a comprehensive description of the missing data strategy and its consequences.

17

The coecients for fund-level home bias are of dierent signs for the CDAX and the MSCI World regressions. This likely reects a regression t problem, since the residuals should be smaller for a home-biased investor when using a German benchmark than when using an international benchmark.

49

5.1. Play-money accounts


We rst check, whether our results are driven by play-money accounts. To identify potential play-money accounts, we compute a ratio of portfolio value to income (PTI) for those investors whose self-reported gross household income data are available. This applies to roughly half of our sample. We then form quintiles based on this ratio. We conjecture that the higher the PTI-ratio is, the less likely an account is play money. To verify that this ratio might indeed be a viable proxy for play money accounts, we compute mean investment behavior measures for a double sort on PTI quintiles and income quintiles. We test whether investment mistakes (lottery-stock preference, and under-diversication) tend to decrease in household income and PTI. Whereas the decrease in income is likely due to increasing investor sophistication, we also observe a decrease PTI, which shows that investors holding portfolios that are less likely to be play-money accounts also make fewer investment mistakes. However, the mistakes are not eliminated in any PTI quintile. This result is also in line with Calvet, Campbell, and Sodini (2007), who nd that the negative impact of investment mistakes decreases with portfolio size. To further test whether play money accounts bias our results, we rerun the regressions from Table 7 after excluding the lowest PTI quintile (not tabulated). In general, results remain qualitatively unaltered. Under-diversication and lottery-stock preference are signicantly negative for alphas and Sharpe ratios. However, the return penalties associated with these behaviors are now smaller, while still economically signicant. The annual theoretical return gains from fully eliminating under-diversication and lotterystock preference are now 3% and 1%, respectively.

50

5.2. MSCI World as a performance benchmark


We repeat the performance analyses with a dierent performance benchmark. Using MSCI World indexes for global stocks, global value stocks, global growth stocks, global small stocks, and global large stocks, we construct a FamaFrench (1993) three-factor model. Using this model, we compute portfolio betas and three-factor alphas as discussed above. We then rerun the regressions of portfolio excess returns and alphas on investment behavior measures and controls using the MSCI World portfolio betas and three-factor alphas. Sharpe ratio regressions are omitted, since Sharpe ratios do not depend on a performance benchmark. The results are documented in Table B.6 in the Appendix. The major conclusions discussed above are robust to this change of benchmark. The coecients of nonlottery-stock preference, forecasting skill, and stock-level disposition eect retain their signs but are now statistically signicant. Although one could argue that this is due to a lack of control for the momentum factor in the three-factor model, it seems unlikely, since the momentum beta is never signicant in the above regressions using the four-factor model. This eect is therefore likely due to dierences in the factor premiums between Germany and the global stock market.

5.3. Net returns


The above analyses all use gross returns. To determine whether this aects results, we repeat the analyses from Table 7 using returns, alphas, and Sharpe ratios net of brokerage commissions and exchange fees. The results are reported in Table B.7 in Appendix B. In sum, the results are very similar to those using gross performance. The only dierence worth noting is that portfolio turnover is now signicantly negatively associated with performance in all portfolios. This nding is in line with that of Barber and Odean

51

(2000), that higher portfolio turnover does not change gross returns but signicantly diminishes net returns.

5.4. Alternative variable denitions


We test several alternative variable denitions. First, since Linnainmaa (2010) demonstrates that the use of limit orders by individual investors can sometimes inuence inferences about their investment behavior, we recalculate portfolio turnover, leading turnover, and trade clustering using only market orders. When rerunning the full portfolio analyses from Table 7 with these market order-based variables, we obtain qualitatively similar results. The only exception is that portfolio turnover is now signicantly negatively associated with gross portfolio performance. Second, we redene trade clustering using an index of cluster size that measures the dispersion of trades across time (see Appendix A for details). Using this measure, we rerun the full portfolio regressions from Table 7 (not tabulated) and obtain highly comparable results. Third, we replace N ormV ar with the HerndahlHirschman Index (HHI) as our measure of portfolio under-diversication. The results (not tabulated) are qualitatively comparable but somewhat weaker, since the coecient is always negative but only statistically signicant when using four-factor alphas.

6.

Conclusion
We investigate the multivariate relation between ten dierent measures of invest-

ment behavior and portfolio performance. Only for two of the ten measures scrutinized, namely under-diversication and lottery-stock-preference, we nd statistically signicant 52

and economically large negative eects on performance. Reducing these behaviors by one standard deviation relative to the sample mean would allow investors to improve their annual returns by 3% for lottery-stock preference and 1% for under-diversication. Eliminating these behaviors entirely would yield improvements of 4% for under-diversication and 3% for lottery-stock preference. These ndings are robust to dierent performance measures and performance benchmarks such as the CDAX or the MSCI World as well as any eects of cross- and auto-correlation in the data. These ndings contribute to the current debate on improving investor decision making. Private investors nancial decisions are becoming particularly important as (expected) benets from public pension schemes decrease all over the world. Given the large body of literature on investment mistakes, Campbell (2006) urges nancial economists to devise ways to mitigate the consequences of these mistakes. Our results contribute to this goal by pointing out which investment behaviors are most detrimental to private investors. For under-diversication and lottery-stock preference relatively easy to implement remedies exist. Under-diversication could simply be reduced by purchasing products that oer built-in diversication, such as exchange-traded funds or mutual funds. Because lottery stocks do not form an integral part of an investment portfolio, there is no need to hold them at all. Yet, it seems that much more needs to done to understand how to convince investors to abandon detrimental behaviors, given that they are likely not to follow well-meant and objectively sound advice (Bhattacharya et al., 2012) and are uninformed of the current situation and their past performance (Glaser and Weber, 2007b). Of course, there is some evidence that nancial education programs might help improving individuals nancial decision making (see Fox, Bartholomae, and Lee, 2005, for an overview). However, despite all eorts the average level of nancial literacy continues to be low (Lusardi and

53

Mitchell, 2007). In contrast, task-specic programs in the spirit of the Save More Tomorrow plan of Thaler and Benartzi (2004), which exploit behavioral biases to encourage better decisions, might be better suited to help people overcome their (costly) investment behaviors. Research should therefore strive to identify and test further ideas to improve investor decision making. One such idea might be whether increasing investors awareness of costly investment behaviors through improved portfolio reporting will aect their behavior.

54

Appendix A: Construction of bias proxies


A.1. Turnover
We calculate three versions of active monthly portfolio turnover: total portfolio turnover, stock portfolio turnover, and fund portfolio turnover. Active turnover is dened as transaction value after excluding automated (e.g., savings plans) and pseudotransactions (e.g., portfolio transfers) in relation to portfolio value. Depending on the version to be calculated, we include the transaction volumes and holdings of all securities (portfolio turnover), of only stocks (stock turnover), or of only funds (fund turnover). On each day, we aggregate the value of purchase and sale transactions for the respective version of the turnover measure. Similar to Barber and Odean (2000, 2001), to construct portfolio turnover on day d, we divide the purchase value on day d 1 by the portfolio value at the end of day d 1 and the sale value on day d by that same value. This procedure is meant to alleviate outlier problems, since trading volumes are matched to portfolio values that include those securities that were traded. Not proceeding in this way might lead to very high turnover gures if investors build up or reduce large positions. We average purchase and sale turnover each day and calculate the monthly sum. Turnover is thus dened as:

Buyvolumeid1 +Sellvolumeid ) T urnoverit = D d=1 0.5 ( P ortV alid1

(2)

where Buyvolumeid1 is the total value of all purchase transactions in euros on the day preceding day d, Sellvolumeid is the total euro value of all sales transactions on day d, and P ortvalid1 is the total value of all portfolio holdings at the end of day d 1 (i.e., 55

also at the beginning of day d). This percentage turnover measure is summed across all days D in month t. To be able to control for the possible inuence of limit orders (cf. Linnainmaa, 2010, for this issue), we also compute an alternative portfolio turnover value after excluding all limit orders. For the full portfolio, the turnover measures with and without limit orders are highly positively correlated ( = 0.6323, p = 0.000).

A.2. Leading turnover share


Ozsoylev et al. (2011) provide evidence that investors who are more central to an information network in the stock market trade earlier than other investors when new information arrives and achieve higher returns. We therefore include a measure of an investors leading turnover (again excluding automated and pseudo-transactions). To construct this measure, we rst create pairs of investors by combining each investor with all other investors. For each pair of investors, say, investors A and B, we determine the number of occasions on which both investors trade within 10 days of each other and in the same direction (i.e., both buy or both sell). Using these trades, we calculate the share of trades in which investor A traded before investor B. We dene investor A as leading investor B if they have at least seven trades within 10 days of each other during the sample period and A trades before B at least 75% of the time. All of As trades that lead Bs are then agged as leading transactions. We repeat this calculation for all investor pairs and create a measure of leading transaction volume per investor. From this, we create monthly portfolio turnover gures as described above (again for the full portfolio, for the stock part of each portfolio, and for the fund part) and divide these by the regular portfolio turnover. This gives us a percentage of the leading turnover each month and reduces collinearity problems (since

56

investors who make larger transactions should have higher absolute regular and leading turnover each month). Again, we also repeat this exercise after excluding all limit orders from the sample. As for the regular turnover gures, the measures with and without limit orders are highly correlated ( = 0.760, p = 0.000).

A.3. Home bias


Home bias (French and Poterba, 1991; Tesar and Werner, 1995; Lewis, 1999) is measured as the raw portfolio weight of German stocks/funds investing in German stocks in the stock/fund part of an investors portfolio. An alternative approach would be to subtract Germanys share of global market capitalization from this portfolio weight (e.g., Srensen et al., 2007). However, since we are dealing almost exclusively with German investors and Germany accounted for only 2.7% of global market capitalization in 2011,18 this is not likely to make a dierence. We dene German stocks as all stocks whose ISIN starts with the German country identier DE. At the end of each month, we calculate the value of these German stocks and divide it by the total value of all stocks held by the investor. For mutual funds, we proceed similarly. Since a funds ISIN does not allow for the identication of the geography in which the fund invests, we use data from Lipper instead. Specically, we identify all funds that have Germany as their stated geographical investment focus and calculate their monthly share of each investors mutual fund holdings.

18

My own calculation based on World Bank data. Raw data are available at http://data.worldbank. org/indicator/CM.MKT.LCAP.CD/countries (accessed January 31, 2013).

57

A.4. Local bias


For stocks, we dene local bias as the dierence between an investors value-weighted distance to the market portfolio and the distance to companies in his or her portfolio. To calculate this measure, we obtain the headquarter zip codes for around 1,800 German companies (our proxy for the market portfolio). The residential zip codes of our investors are part of the data sample provided by the bank.19 Using a freely available database20 of the geographical coordinates of each zip code, we calculate the spherical distances between investors and the headquarters of the 1,800 companies. At the end of each month, we calculate both the value-weighted distance between an investor and the investors portfolio securities as well as between the investor and all 1,800 companies. The weights used to calculate the portfolio distances are the euro values of investor holdings, while we use endof-month market capitalizations when calculating the weighted distance to the market portfolio. The dierence between the market distance and the portfolio distance is our proxy for local bias. If it takes on a positive value, the investor is closer to his or her portfolio than is warranted by geographical position alone. For mutual funds, we rst identify the headquarter zip codes of mutual fund companies managing funds domiciled in Germany in which our sample investors own shares. Since the German mutual fund industry is heavily clustered in a few urban centers (Frankfurt, Cologne, Munich), we cannot use raw portfolio weights as a local bias proxy. For instance, an investor with a high portfolio share of Frankfurt-based funds who lives in Frankfurt need not be locally biased if the share of Frankfurt-based funds in the German market is generally very high. We therefore calculate fund-level local bias as a deviation from the sample average (see Eq. (3)). First, we calculate the value-weighted mean distance of an
19

There are some 100 investors for which we could not match zip codes to our coordinate database. For these investors, we chose the nearest zip code in their vicinity for which we had coordinate data as a replacement. 20 See http://opengeodb.org/wiki/OpenGeoDB.

58

investor to the headquarters of the mutual fund companies of the funds held. For each month, we then compute the average distance of investors from their funds and subtract the individual distances from this value. Thus, we obtain a measure of excess closeness to mutual fund companies:

unds LocalBiasF = Distanceit Distanceit it

(3) Distanceit = (Distanceij P ortW eightijt )

where Distanceij is the distance in kilometers between investor i and the headquarters of the company managing fund j and P ortW eightijt is the percentage share of portfolio value allocated to fund j in investor is portfolio in month t.

A.5. Under-diversication
Following Goetzmann and Kumar (2008), we calculate two measures of portfolio diversication, again in three versions (one for the full portfolio, one using only stock holdings, and one using only fund holdings). The rst measure is the HHI, that is, the sum of the squared portfolio weights (see Eq. (4)). Besides its obvious interpretation as the degree of portfolio concentration, the HHI can also be interpreted as measuring the degree to which an investor deviates from holding the market portfolio. If one assumes that the weight of each security in the market portfolio is zero, the sum of squared portfolio weights exactly equals the sum of squared deviations from market portfolio weights. In reality, this is obviously not the case. Nevertheless, individual security weights in the market portfolio tend to be very small, making this a reasonable approximation.

59

We calculate the index at the end of each month t and assume that each mutual fund consists of 50 dierent securities (Dorn and Huberman, 2005):

HHIit = (

EU RV aluejt 2 ) P ortV alt

(4)

The resulting statistic takes on values between zero and one, where zero is perfect diversication and one results for investors who hold only a single security (that is not a mutual fund). The HHI primarily measures the extent of mechanical diversication that investors accomplish by buying dierent securities or funds. It might thus overstate the actual degree of diversication if investors buy highly correlated securities. To measure the realized benets of diversication, we also compute each investors monthly normalized portfolio variance. This measure is dened as the ratio of the portfolio return variance to the average return variance of portfolio securities:

N ormV arit =

it ijt

(5)

At the end of each month, we construct the variancecovariance matrix for all securities in the investors portfolio, using return data from the preceding 60 months. We drop all securities for which fewer than 24 months of return data are available. With this matrix, both the value-weighted average return variance and the portfolio return variance can be calculated. The resulting statistic also takes on values between zero and one, with a value of zero for perfectly negatively correlated securities and a value of one for perfectly positively

60

correlated securities. The variables HHIit and N ormvarit are highly positively correlated ( = 0.501, p = 0.000) but not perfectly so, indicating that the HHI does not fully capture realized diversication benets. We therefore use the normalized variance in our main analyses and check our results by running an additional analysis using the HHI.

A.6. Lottery-stock preference


Following Kumar (2009), we dene as lottery stocks such stocks that have a low price, high idiosyncratic volatility, and high idiosyncratic skewness. Since our investors invest in a wide range of stocks from markets all over the world, we take the collective of stocks any of our investors ever invested in (over 19,000 stocks) as a proxy for the global stock portfolio. Consequently, we partition all of these stocks into lottery stocks and other stocks. To do this, we calculate idiosyncratic skewness and volatility in each month t from daily stock returns in t 6 through t 1. Idiosyncratic volatility is computed as the standard deviation of the residual from a three-factor model regression, using factors constructed from the MSCI World indexes. We use a factor model constructed from an international index to reect the above-mentioned international diversication of our sample investors. Idiosyncratic skewness is calculated similarly as by Harvey and Siddique (2000) and Kumar (2009), by computing the skewness of the residual from a regression of stock returns on the return on the MSCI World index and its square. Having calculated these statistics, we sort stocks in each month into an upper and a lower half on month t 1s stock price, idiosyncratic volatility, and idiosyncratic skewness. Stocks in the lower price half and upper volatility and skewness halves are declared lottery stocks. Stocks in the upper price and lower volatility and skewness halves are 61

declared non-lottery stocks. Using these denitions, we calculate market-adjusted lottery preference as

LotteryP refit =

arket LotteryShareit LotteryshareM t arket LotteryShareM t

(6)

where LotteryShareit is the raw portfolio weight of lottery stocks in investor is portfolio
arket at the end of month t and LotteryShareM is the percentage of market capitalization t

of all stocks in our sample due to lottery stocks at the end of month t. Non-lottery preference is dened identically, using the weights of non-lottery stocks in an investors portfolio and the market portfolio.

A.7. Trade clustering


Following Kumar and Lim (2008), we construct three versions (one using all transactions, one using only stock transactions, and one using only fund transactions) of a measure of trade clustering. It is dened simply as one minus the ratio of days on which an investor trades to the number of trades the investor places and is calculated using a rolling window from t 12 through t 1:

T rades Clusteringit = 1

1 t k=t12 T radingDaysik 1 t k=t12 T radesik

(7)

Using such a rolling window avoids the problem of not many investors trading each month, which would make it impossible to assess their amount of trade clustering on a purely monthly basis.

62

As a second measure of trade clustering, we calculate the index of cluster size (ICS) used in the spatial analysis literature. This is simply the ratio of the variance to the mean of a count measure representing spatial density minus one. Under a completely random process, this value follows a Poisson distribution and has an expected value of zero. Negative values point toward a uniform distribution, while positive values indicate clustering in the data. To calculate this statistic, we compute the number of trades an investor makes each day in the time frame t 12 through t 1 (lling in zeros for days on which the investor does not trade). The ratio of variance to the mean of trades per day is then our index of cluster size:

ICS Clusteringit =

1 1 t k=t12 (T rades N 1

per dayik T rades per dayit )2

T rades per dayit

(8)

where T rades per dayik is the number of trades the investor conducts on day k . Although slightly mislabeled, k increments in days from t 12 to t 1, which are dened in months (i.e., it increments approximately 250 times, since this is the approximate number of trading days per year). Although calculating the index of cluster size on a monthly basis is also possible, it greatly decreases the granularity and precision of the estimate. Both measures of trade clustering are highly correlated ( = 0.707, p = 0.000), however, which is why we rely on the simpler clustering measure in our analyses.

A.8. Disposition eect


To estimate the disposition eect for our sample investors, we follow recent studies (e.g., Ivkovi c, Poterba, and Weisbenner, 2005; Shumway and Wu, 2006; Nolte, 2012) and estimate a hazard model to determine the inuence of gains and losses on selling decisions. We estimate separate models for stocks and mutual funds, since prior research 63

shows investors exhibit very dierent trading behaviors with these two types of nancial instruments (Ivkovi c and Weisbenner, 2009). For stocks, we use an approach similar to that of Feng and Seasholes (2005). We rst construct stock holding periods ranging from an investors rst purchase of a stock to the rst sale of this stock (even if only a partial sale). This approach is used to avoid ambiguity in matching sales with purchases. However, we start a new holding period every time an investor sells all his or her holdings in a stock and then repurchases this same stock. Additional purchases occurring before the rst sale are kept and interpreted as continued holding decisions. The investors assumed reference point (here the valueweighted average purchase price) is updated with each subsequent purchase. For each day an investor holds a stock, we compare the reference price with that stocks daily high and low prices. If the low price lies above the reference price, the day is marked as a gain. When the high price lies below the reference price, that day constitutes a loss. For mutual funds, we also form holding periods from the rst purchase and the rst sale. Similar to Ivkovi c and Weisbenner (2009), we calculate the daily cumulative return on holding each fund from the Thomson Reuters Datastream daily total return index divided by the index value at purchase (as high and low prices are not available for many mutual funds). Days on which this cumulative return lies below or above one are marked as a loss or a gain, respectively. The cumulative return is also adjusted for additional purchases between the rst purchase and rst sale by updating the value-weighted average return index at purchase. Using these data, we estimate Cox (1972) proportional hazard models for stocks and mutual funds:

64

hi (t) = (t) eX

(9)

where the hazard of selling a security holding i on day t after purchase is given as the baseline hazard proportionally shifted by the covariates X . The baseline hazard is nonparametric and estimated using maximum likelihood. In addition, we cluster standard errors at the level of each individual holding period. We include several (time-varying and xed) covariates in the hazard model. First, we include either the gain or the loss indicator (we cannot include both at the same time since they are nearly perfectly collinear), which also allows us to detect any asymmetries in the treatment of gains and losses, as Feng and Seasholes (2005) do. A positive (negative) value for the coecient of the gain (loss) indicator would point to the existence of the disposition eect. In addition, we include a month dummy, a December dummy meant to cover tax-loss selling, and a tax exemption dummy. The latter captures a peculiarity of the German capital gains taxation system that was in force until 2009: After a security was held for one year, any gains or losses from a subsequent sale became irrelevant for tax purposes. All control variables are interacted with the gain/loss indicator to determine their inuence on the disposition eect. The nal hazard models thus takes the form

hGain (t) = (t) e1 Gainit +2 T axExemptit +3 Decemberit i


+4 M onthit +5 T axExemptit Gainit +6 Decemberit Gainit +7 M onthit Gainit

(10) hLoss (t) = (t) e1 Lossit +2 T axExemptit +3 Decemberit i


+4 M onthit +5 T axExemptit Lossit +6 Decemberit Lossit +7 M onthit Lossit

65

Since these models require a minimum amount of data to be reliable, we estimate them only for investors with at least six round trips. We then use the interaction term of the month dummy to generate a time-varying measure of the PRG and PRL (not to be confused with PGR/PLR, used by Odean, 1998a). The dierence of these measures (PRG - PRL) is our measure of an investors disposition eect.

A.9. Forecasting
We follow Nicolosi, Peng, and Zhu (2009) in constructing three versions (one using all transactions, one using only stock transactions, and one using only fund transactions) of a proxy for investor forecasting ability. The general idea is to measure whether excess returns on securities investors purchase are statistically signicantly dierent from zero. To calculate this measure, we proceed in two steps. First, we calculate excess returns subsequent to all active investor transactions (i.e., no savings plans and no portfolio transfers). These excess returns are dened as the dierence between daily returns on the security purchased, the risk-free rate, and three factor returns multiplied by the securitys loading on these factors:

Excess rjk = 20 t=1 rjt rf t jk,RM RF RM RFt jk,SM B SM Bt

(11)

jk,HM L HM Lt
Excess where rjk is the sum of daily excess returns on security j in transaction k for 20

trading days following the purchase (excluding the purchase date t = 0). We sum up excess returns to obtain a single performance indicator for each transaction. The risk-free rate (rf t ) used in this calculation is proxied for by the three-month money-market rate. Factor betas are estimated by regressing daily returns on security j from t 100 through 66

t 1 on RMRF, SMB, and HML factors constructed using the MSCI World indexes for each transaction. These betas are multiplied with the respective factor returns in t + 1 through t + 20 to determine each securitys expected daily return. Having computed excess returns for all active transactions, we determine each investors time-varying forecasting skill as follows. For each month t, we conduct a one-sided t-test against the null hypothesis of zero on the excess returns realized on all purchase transactions up to month t 2 (we cannot include month t 1 because this would induce a mechanical correlation with month ts portfolio returns due to the 20-trading day window used in determining excess returns). The signicance level from this t-test is then subtracted from one and multiplied by the sign of the average excess return:

F orecastingit = (1 Signif icanceit ) (

IrExcess >0
ik

0.5)

(12)

Excess >0 is an indicator of whether where Signif icanceit is the p-value from the t-test and Irik

transaction k (of K transactions by investor i) has a strictly positive excess return.

A.10. Trend chasing


Studies such as those of Sirri and Tufano (1998), Bergstresser and Poterba (2002), and Sapp and Tiwari (2004) demonstrate that investors chase past fund performance, that is, fund inows are highest for those funds with the best recent performance. To capture this behavior, we compute the average prior-year return on all funds an investor purchases. Specically, for every active fund purchase (i.e., excluding portfolio transfers and automated savings plans), we compute the total return on the fund purchased between the day before the transaction and one year before the transaction. These returns

67

are then turned into an expanding-window rolling average for each investor. That is, the trend chasing variable in month t is the average prior-year return on all funds actively purchased up to month t 1 (to exclude mechanical correlation with month ts portfolio return).

68

Appendix B: Further methodology notes and results


B.1. Dealing with missing data
To ensure a consistent sample when running the dierent specications of our main regressions, we include only those observations in all multivariate analyses that have nonmissing values for the portfolio return and the control variables Sex, Age, and RiskClass. In addition, we adopt a specic strategy for each variable to deal with missing data. This is necessary, since the randomly distributed data across all investment behavior proxies would otherwise lead to a very small (potentially non-random) sample of investors for whom all proxies can be estimated. The guiding idea behind each of these strategies is to treat all investors with missing data for a specic behavior as not exhibiting this behavior. This way, the treatment of missing data can only bias our analyses against nding an eect and should not introduce articial eects. To demonstrate this, we also provide an analysis of the relation between investment behavior and performance before and after treating missing values (see Table B.1). The variables T urnover and LeaderShare can, by design, not exhibit missing values, since they are simply zero whenever no transactions for an investor are recorded. The variables HomeBiasStocks and HomeBiasF unds can only not be estimated if the investor does not hold any stocks or funds. In this case, they must logically take on the value of zero, however, since an investor who does not hold stocks cannot be home biased in his or her stock portfolio. The variable N ormV ar can exhibit missing values if we cannot estimate variances or covariances for the securities an investor holds. On the other hand, HHI can always be estimated, since we need only portfolio holdings data and do not need to know anything about the securities as such (except which ones are mutual funds). We therefore replace N ormV ar with one whenever it is missing and HHI 69

is one and discard all remaining observations with a missing value for N ormV ar, since we do not see any other justiable strategy (this approach aects only 1% of observations, however). Lastly, missing data are also not much of a problem for F orecasting and T rendChasingF unds , since the variables can reasonably take on the value zero before each investors rst transaction (i.e., no forecasting skill or trend chasing, either positive or negative). After an investors last transaction, we just carry forward the last computed value of F orecasting and T rendChasing . In sum, the assumptions regarding these seven variables appear not to be critical and will therefore not be discussed further. A missing value for LocalBiasstocks or LocalBiasF unds can result if an investor holds German stocks/funds and we do not have zip code data for either the investor or the companies represented by the securities the investor holds. This is the case for about 7% (3%) of observations for LocalBiasStocks (LocalBiasF unds ). These observations are replaced by zero (i.e., we assume no dierence between the distance to the market portfolio and that to ones own portfolio). As Table B.1 shows, this does not make a substantial dierence for inference. For LotteryP ref and N onLotteryP ref , missing data can occur only if an investor does hold stocks but we cannot estimate their idiosyncratic skewness or volatility. This is the case for less than 1% of observations and we replace these with -1 (which means that no weight is put on lottery or non-lottery stocks, which leads to a negative excess weight relative to the market). As Table B.1 shows, this does not make a substantial dierence for inference. Finally, Clustering and Disposition are two variables for which a missing value strategy is essential, because missing values result if investors do not trade at all (Clustering ) or too little (Disposition). Omitting these observations would thus constitute a sample selection bias, since only those investors who trade more frequently are included. Accord70

ingly, we assume that investors for whom Clustering or Disposition cannot be estimated do not exhibit the behavior in question. In the case of Clustering , this means that we assign a value of zero (no trade clustering) to every investor who has not traded in the last 12 months. We assign a value of zero for Disposition to all investors for whom the hazard model could not be estimated (i.e., no dierence between PRG and PRL). As can be seen from Table B.1, missing values for these variables arise quite frequently (each over 25% of observations), but making the above assumptions does not change the relation between trade clustering, the fund-level disposition eect, and portfolio performance. For the stock-level disposition eect, the size of the eect remains comparable but changes from marginal signicance (p = 0.07) to marginal insignicance (p = 0.12). We conclude, that the missing variable strategy does not drive our results.
Table B.1: Eects of missing values strategy
This table presents the eects of replacements made for missing values in several bias proxies. The coecients are from an OLS regression of monthly portfolio excess returns on behavior proxies, using two-way clustered standard errors (on investors and time) to correct for any kind of cross-correlation or autocorrelation. *, **, and *** denote signicance at the 10%, 5%, and 1% levels, respectively. Before N LocalBiasStocks LocalBiasF unds ClusteringAll LotteryP ref N onLotteryP ref DispositionStocks DispositionF unds 474,197 465,188 371,747 476,727 476,727 311,912 302,000 Coecient 0.0005** 0.0000 -0.0008*** -0.0042*** 0.0026*** 0.0003* 0.0000 N 479,111 479,111 485,961 479,111 479,111 485,961 485,961 After Coecient 0.0005** 0.0000 -0.0009*** -0.0042*** 0.0026*** 0.0002 -0.0000

71

B.2. Further results from the main analyses


Table B.2: Investor-level temporal stability of biases
This table presents investor-level autocorrelations across lags of six, 12, and 24 months for investment behavior proxies. All variables are peer-group adjusted using portfolio value and trading frequency quintiles and were standardized each month to meet the normality assumption underlying the signicance test for the correlation coecients. In addition, all investors with fewer than 12 monthly observations were excluded from the analysis. 6 months Mean T urnoverAll T urnoverStocks T urnoverF unds ClusteringAll ClusteringStocks ClusteringF unds DispositionStocks DispositionF unds LeaderShareAll LeaderShareStocks LeaderShareF unds F orecastingAll F orecastingStocks F orecastingF unds T rendChasingF unds,it HomeBiasStocks HomeBiasF unds LocalBiasStocks LocalBiasF unds LotteryP ref N onLotteryP ref N ormV arAll N ormV arStocks N ormV arF unds 0.08 0.07 0.05 0.38 0.37 0.34 0.31 0.30 0.05 0.04 0.04 0.46 0.46 0.45 0.24 0.50 0.32 0.46 0.27 0.24 0.11 0.49 0.47 0.46 % p 0.05 0.22 0.22 0.14 0.73 0.70 0.57 0.55 0.50 0.15 0.15 0.14 0.77 0.78 0.71 0.12 0.81 0.63 0.77 0.46 0.54 0.39 0.85 0.81 0.76 12 months Mean 0.04 0.04 0.03 0.01 -0.04 -0.01 0.22 0.22 0.03 0.03 0.04 0.27 0.28 0.26 0.11 0.31 0.18 0.26 0.16 0.13 0.07 0.28 0.27 0.24 % p 0.05 0.16 0.15 0.11 0.39 0.35 0.31 0.42 0.39 0.10 0.10 0.12 0.60 0.62 0.55 0.06 0.63 0.43 0.56 0.33 0.35 0.28 0.65 0.60 0.56 24 months Mean 0.01 0.00 0.01 -0.06 -0.08 -0.07 0.14 0.13 0.00 0.00 0.00 0.07 0.09 0.09 -0.00 0.12 0.05 0.06 0.04 0.02 -0.00 0.06 0.06 0.03 % p 0.05 0.10 0.09 0.07 0.34 0.31 0.26 0.31 0.30 0.07 0.07 0.07 0.43 0.43 0.44 0.05 0.49 0.26 0.43 0.23 0.24 0.22 0.47 0.44 0.42

72

Table B.3: Temporal stability of biases in the cross-section


This table presents the cross-sectional means of individual investment behavior proxies over time. We leave out the year 1999 because our investors entered the sample this year and it is thus less representative. All bias denitions are as described in Table 3 and Appendix A. 2000 T urnoverAll T urnoverStocks T urnoverF unds ClusteringAll ClusteringStocks ClusteringF unds DispositionStocks DispositionF unds LeaderShareAll LeaderShareStocks LeaderShareF unds F orecastingAll F orecastingStocks F orecastingF unds T rendChasingF unds,it HomeBiasStocks HomeBiasF unds LocalBiasStocks LocalBiasF unds LotteryP ref N onLotteryP ref N ormV arAll N ormV arStocks N ormV arF unds 0.30 0.20 0.02 0.21 0.20 0.12 4.08 3.55 0.04 0.04 0.00 -0.18 -0.20 0.04 1.21 0.55 0.02 14.87 -0.00 2.27 -0.22 0.56 0.59 0.86 2001 0.20 0.13 0.01 0.20 0.19 0.12 4.07 3.32 0.02 0.01 0.00 -0.21 -0.20 -0.21 0.49 0.59 0.02 18.71 -0.00 7.83 -0.29 0.54 0.58 0.82 2002 0.18 0.10 0.01 0.17 0.16 0.13 4.09 4.18 0.02 0.01 0.00 -0.17 -0.16 -0.18 0.20 0.61 0.03 19.11 -0.00 9.00 -0.19 0.54 0.59 0.78 2003 0.20 0.09 0.01 0.17 0.15 0.12 4.07 4.63 0.02 0.01 0.00 -0.17 -0.15 -0.18 0.18 0.63 0.03 18.13 0.00 7.29 -0.17 0.56 0.61 0.76 2004 0.17 0.07 0.01 0.20 0.15 0.14 3.82 4.29 0.02 0.01 0.00 -0.11 -0.09 -0.10 0.27 0.64 0.03 16.27 0.00 5.82 -0.10 0.55 0.61 0.74 2005 0.17 0.08 0.02 0.20 0.15 0.17 3.73 4.21 0.01 0.01 0.00 -0.08 -0.07 -0.01 0.28 0.64 0.03 16.43 -0.00 8.20 -0.21 0.53 0.60 0.73 2006 0.17 0.09 0.02 0.24 0.17 0.21 3.62 3.72 0.01 0.01 0.00 -0.01 -0.04 0.12 0.33 0.64 0.03 18.12 -0.00 6.39 -0.25 0.53 0.60 0.75 2007 0.17 0.09 0.02 0.26 0.18 0.23 3.38 2.66 0.02 0.01 0.01 -0.02 -0.04 0.16 0.30 0.63 0.03 17.73 0.00 4.64 -0.29 0.52 0.58 0.75 2008 0.16 0.07 0.02 0.26 0.19 0.24 3.73 2.57 0.01 0.01 0.01 -0.13 -0.13 0.09 0.23 0.64 0.03 18.86 0.00 5.10 -0.12 0.54 0.58 0.77 2009 0.11 0.05 0.01 0.23 0.18 0.22 4.08 3.75 0.01 0.01 0.00 -0.20 -0.17 0.04 0.16 0.65 0.03 20.16 0.00 3.95 -0.18 0.57 0.61 0.77 2010 0.11 0.05 0.01 0.17 0.14 0.17 3.71 3.03 0.01 0.01 0.00 -0.17 -0.16 0.06 0.23 0.65 0.03 16.14 -0.00 4.32 -0.20 0.57 0.61 0.76 2011 0.11 0.05 0.01 0.20 0.17 0.19 2.84 1.92 0.01 0.01 0.00 -0.19 -0.18 0.04 0.20 0.66 0.04 16.11 -0.00 4.59 -0.26 0.55 0.60 0.75

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Table B.4: Descriptive statistics of portfolio returns and MSCI World betas
This table presents statistics of portfolio returns and betas. The variable Gross return is an investors monthly portfolio return in excess of the three-month money market rate. We construct it by rst value-weighting daily total returns (generated from Datastream total return indexes and thus reecting capital measures and dividends) on all securities in an investors portfolio. If a transaction occurs, the actual transaction price is also reected in the daily return on that security. Daily returns are then compounded into monthly returns. The variable N et return is the same return after accounting for transaction fees; Gross alpha and N et alpha are monthly three-factor alphas calculated using bottomup betas from a FamaFrench (1993) three-factor model (using returns before and after transaction costs, respectively); GrossSharperatio and N etSharperatio are the ratios of the mean intra-month daily (gross or net) return and its standard deviation; and M SCI,RM RF , M SCI,SM B , and M SCI,HM L are portfolio betas calculated using a FamaFrench (1993) three-factor model constructed from MSCI World indexes (small cap, large cap, value, growth). To construct monthly betas, we implement an approach similar to that of Elton, Gruber, and Blake (2011, 2012) and generate a three-year history of synthetic backward-looking portfolio returns based on security holdings at the end of each month. Using these synthetic returns, we calculate betas associated with the portfolio an investor holds at the end of each month. The terms 2 RM SEM SCI and RM SCI are the residual errors and regression ts, respectively, associated with these analyses. All variables are analogously dened for the stock and fund portions of each investors portfolio. To ensure that outliers are not driving our results, the returns and Sharpe ratios are winsorized at 2%. Mean Panel A: Full portfolio Gross Return N et Return Gross Alpha N et Alpha Gross Sharpe Ratio N et Sharpe Ratio M SCI,RM RF M SCI,SM B M SCI,HM L RM SEM SCI 2 RM SCI -0.0047 -0.0059 -0.0025 -0.0037 0.0199 0.0155 0.3975 0.1336 -0.8617 0.0355 0.3592 0.0014 0.0007 -0.0003 -0.0010 0.0149 0.0107 0.3912 0.1219 -0.7251 0.0272 0.3589 0.0800 0.0801 0.0657 0.0658 0.2334 0.2332 0.3266 0.8067 1.1966 0.0331 0.1893 -0.1463 -0.1482 -0.1114 -0.1134 -0.3787 -0.3837 -0.0721 -1.0352 -2.8454 0.0097 0.0480 0.1118 0.1100 0.0938 0.0924 0.4144 0.4089 0.9093 1.3685 0.5770 0.0884 0.6668 Median Std. Dev. P5 P95

Panel A: Stock portfolio Gross Return N et Return Gross Alpha N et Alpha Gross Sharpe Ratio N et Sharpe Ratio M SCI,RM RF M SCI,SM B M SCI,HM L RM SEM SCI 2 RM SCI -0.0054 -0.0068 -0.0029 -0.0041 0.0110 0.0075 0.4584 0.0939 -1.0061 0.0467 0.3204 -0.0007 -0.0016 -0.0017 -0.0025 0.0068 0.0039 0.4623 0.0222 -0.9176 0.0367 0.3083 0.0961 0.0961 0.0804 0.0804 0.2199 0.2201 0.3553 0.9940 1.4394 0.0374 0.1909 -0.1710 -0.1729 -0.1353 -0.1374 -0.3647 -0.3695 -0.1128 -1.2519 -3.3311 0.0196 0.0336 0.1406 0.1387 0.1188 0.1172 0.3839 0.3798 1.0126 1.7060 0.8836 0.1097 0.6442

Panel A: Fund portfolio Gross Return N et Return Gross Alpha N et Alpha Gross Sharpe Ratio N et Sharpe Ratio M SCI,RM RF M SCI,SM B M SCI,HM L RM SEM SCI 2 RM SCI -0.0017 -0.0024 -0.0007 -0.0014 0.0347 0.0293 0.3184 0.2632 -0.6172 0.0208 0.3787 0.0029 0.0023 0.0004 0.0000 0.0309 0.0256 0.3124 0.2547 -0.5425 0.0199 0.3769 0.0523 0.0523 0.0417 0.0418 0.2424 0.2415 0.2315 0.4252 0.7002 0.0104 0.1712 -0.1014 -0.1021 -0.0737 -0.0745 -0.3795 -0.3848 -0.0176 -0.3806 -1.8586 0.0049 0.0823 0.0736 0.0730 0.0635 0.0630 0.4434 0.4348 0.6902 0.9616 0.2916 0.0395 0.6526

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Table B.5: Multivariate analysis of investment behavior and idiosyncratic portfolio risk
This table presents the results from OLS regressions of monthly portfolio idiosyncratic volatility on proxies for investment behavior and several control variables. We compute idiosyncratic portfolio volatility by rst constructing an articial time series of weekly value-weighted portfolio returns that would have been obtained had the investor held the current portfolio for the previous three years (including the current month). We regress this return time series alternatively on a Carhart (1997) four-factor model constructed from the CDAX or a FamaFrench (1993) three-factor model constructed from MSCI World indexes and use the standard deviation of the residuals as our measure of idiosyncratic portfolio volatility. This measure is regressed each month on investment behavior variables and controls. Regression standard errors (in parentheses) are adjusted for two-way clustering at the investor and time levels (cf. Cameron, Gelbach, and Miller, 2011; Petersen, 2009). All investment behavior variables are dened in Table 3 and are peer-group adjusted (by subtracting the mean in each investors portfolio size and trading frequency quintile) and standardized. *, **, and *** denote signicance at the 10%, 5%, and 1% levels, respectively.

CDAX Panel A: Entire portfolio 0.0008*** (0.0001) ClusteringAll,it 0.0005*** (0.0001) DispositionStocks,it -0.0002** (0.0001) DispositionF unds,it 0.0000 (0.0001) LeaderShareAll,it -0.0002*** (0.0001) F orecastingAll,it -0.0005*** (0.0002) T rendChasingF unds,it 0.0003*** (0.0001) HomeBiasStocks,it1 -0.0027*** (0.0002) HomeBiasF unds,it1 -0.0003* (0.0001) LocalBiasStocks,it1 -0.0003* (0.0001) LocalBiasF unds,it1 -0.0000 (0.0001) LotteryP refit1 0.0078*** (0.0003) N onLotteryP refit1 -0.0041*** (0.0002) N ormV arAll,it1 0.0059*** (0.0002) Sexi 0.0013** (0.0005) Agei -0.0000 (0.0000) M arriedi -0.0003 (0.0004) RiskClassi 0.0016*** (0.0001) HasP hDi -0.0003 (0.0006) IsGermani -0.0021** (0.0010) Experienceit1 0.0000*** (0.0000) P ortV alit1 -0.0071*** (0.0003) OptionShareit1 0.0558*** (continued) T urnoverAll,it

MSCI World

0.0006*** (0.0001) 0.0006*** (0.0001) -0.0002* (0.0001) 0.0000 (0.0001) -0.0001 (0.0001) -0.0005*** (0.0002) 0.0004*** (0.0001) -0.0009*** (0.0002) 0.0003** (0.0001) -0.0003** (0.0001) -0.0000 (0.0001) 0.0076*** (0.0003) -0.0037*** (0.0002) 0.0065*** (0.0002) 0.0016*** (0.0005) -0.0000 (0.0000) -0.0002 (0.0004) 0.0015*** (0.0001) -0.0002 (0.0006) -0.0018* (0.0009) 0.0000** (0.0000) -0.0068*** (0.0003) 0.0618***

75

(continued) W arrantShareit1 StockShareit1 F undShareit1 Intercept N R2 (0.0050) -0.0039 (0.0030) 0.0128*** (0.0015) -0.0199*** (0.0016) 0.0944*** (0.0036) 474,943.00 0.46 (0.0051) -0.0003 (0.0029) 0.0170*** (0.0015) -0.0164*** (0.0016) 0.0921*** (0.0036) 474,943.00 0.46

Panel B: Stocks in portfolio T urnoverStocks,it ClusteringStocks,it DispositionStocks,it LeaderShareStocks,it F orecastingStocks,it HomeBiasStocks,it1 LocalBiasStocks,it1 LotteryP refit1 N onLotteryP refit1 N ormV arStocks,it1 Sexi Agei M arriedi RiskClassi HasP hDi IsGermani Experienceit1 P ortV alit1 Intercept N R2 0.0003* (0.0001) 0.0002 (0.0001) 0.0001 (0.0002) 0.0000 (0.0001) -0.0007*** (0.0002) -0.0067*** (0.0003) -0.0005*** (0.0002) 0.0111*** (0.0005) -0.0078*** (0.0002) 0.0106*** (0.0003) 0.0010* (0.0006) -0.0000 (0.0000) -0.0005 (0.0005) 0.0012*** (0.0002) -0.0014** (0.0006) 0.0011 (0.0011) 0.0000*** (0.0000) -0.0079*** (0.0003) 0.1154*** (0.0032) 410,872.00 0.48 0.0002 (0.0001) 0.0002** (0.0001) 0.0001 (0.0002) 0.0001** (0.0000) -0.0007*** (0.0002) -0.0038*** (0.0003) -0.0004*** (0.0001) 0.0111*** (0.0005) -0.0070*** (0.0002) 0.0102*** (0.0003) 0.0013** (0.0006) -0.0000 (0.0000) -0.0004 (0.0004) 0.0011*** (0.0001) -0.0009 (0.0006) 0.0010 (0.0010) 0.0000** (0.0000) -0.0075*** (0.0003) 0.1161*** (0.0031) 410,872.00 0.46

Panel C: Funds in portfolio T urnoverF unds,it ClusteringF unds,it DispositionF unds,it 0.0000 (0.0000) -0.0003*** (0.0000) 0.0000 (0.0001) (continued) -0.0001* (0.0000) -0.0002*** (0.0000) 0.0000 (0.0001)

76

(continued) LeaderShareF unds,it F orecastingF unds,it T rendChasingF unds,it HomeBiasF unds,it1 LocalBiasF unds,it1 N ormV arF unds,it1 Sexi Agei M arriedi RiskClassi HasP hDi IsGermani Experienceit1 P ortV alit1 Intercept N R2 -0.0000 (0.0000) -0.0002** (0.0001) 0.0010*** (0.0001) -0.0010*** (0.0001) -0.0003*** (0.0001) 0.0034*** (0.0001) 0.0008** (0.0003) 0.0000*** (0.0000) 0.0000 (0.0002) 0.0006*** (0.0001) -0.0003 (0.0005) -0.0005 (0.0007) 0.0000 (0.0000) -0.0017*** (0.0002) 0.0290*** (0.0018) 266,569.00 0.20 0.0000 (0.0000) -0.0002** (0.0001) 0.0010*** (0.0001) -0.0001 (0.0001) -0.0003*** (0.0001) 0.0042*** (0.0001) 0.0011*** (0.0003) 0.0000** (0.0000) 0.0001 (0.0002) 0.0006*** (0.0001) -0.0005 (0.0004) -0.0004 (0.0006) -0.0000 (0.0000) -0.0018*** (0.0002) 0.0336*** (0.0017) 266,569.00 0.25

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Table B.6: Multivariate analysis of investment behavior and portfolio performance using an MSCI World benchmark
This table presents results from OLS regressions of monthly portfolio performance measured as excess returns over the risk-free rate or three-factor alphas on proxies for investment behavior, portfolio betas, and several control variables. The regressions using returns control for cross-sectional dierences in risk exposure by including portfolio betas in the regression model. These monthly betas are calculated bottom up, as described above, using a FamaFrench (1993) three-factor model constructed from MSCI World indexes (small cap, large cap, value, growth). The three-factor alphas are computed by rst taking the averages of the beginning-of-month and end-of-month portfolio betas for the RMRF, SMB, and HML factors and multiplying these with the realized factor premiums each month. Subtracting the sum of these expected returns from the actual portfolio return gives a monthly three-factor alpha. Monthly excess returns are regressed on behavior proxies, portfolio betas, and controls while the regressions using alphas leave out the portfolio betas. Regression standard errors (in parentheses) are adjusted for two-way clustering at the investor and time levels (cf. Cameron, Gelbach, and Miller, 2011; Petersen, 2009). All investment behavior variables are dened in Table 3 and were peer-group adjusted (by subtracting the mean in each investors portfolio size and trading frequency quintile) and standardized. *, **, and *** denote signicance at the 10%, 5%, and 1% levels, respectively.

Monthly returns Panel A: Entire portfolio T urnoverAll,it ClusteringAll,it DispositionStocks,it DispositionF unds,it LeaderShareAll,it F orecastingAll,it T rendChasingF unds,it HomeBiasStocks,it1 HomeBiasF unds,it1 LocalBiasStocks,it1 LocalBiasF unds,it1 LotteryP refit1 N onLotteryP refit1 N ormV arAll,it1 RM RF,M SCI,it1 SM B,M SCI,it1 HM L,M SCI,it1 Sexi Agei M arriedi RiskClassi HasP hDi 0.0003 (0.0003) -0.0014*** (0.0003) 0.0001 (0.0001) -0.0001* (0.0001) -0.0001 (0.0001) 0.0002 (0.0001) -0.0007** (0.0003) -0.0009 (0.0008) -0.0009*** (0.0003) 0.0003 (0.0002) 0.0001 (0.0001) -0.0027*** (0.0004) 0.0021*** (0.0007) -0.0037*** (0.0007) 0.0295** (0.0125) -0.0012 (0.0033) 0.0004 (0.0020) -0.0008 (0.0005) 0.0000 (0.0000) -0.0001 (0.0002) -0.0006** (0.0003) 0.0006 (continued)

3-factor alphas

-0.0000 (0.0002) -0.0009*** (0.0002) 0.0001* (0.0001) -0.0001 (0.0001) 0.0000 (0.0001) 0.0003* (0.0001) -0.0002 (0.0002) -0.0012* (0.0007) -0.0003 (0.0003) 0.0001 (0.0001) 0.0001 (0.0001) -0.0034*** (0.0004) 0.0024*** (0.0004) -0.0018*** (0.0004)

-0.0001 (0.0006) -0.0000 (0.0000) 0.0002 (0.0002) -0.0004 (0.0002) -0.0000

78

(continued) IsGermani Experienceit1 P ortV alit1 OptionShareit1 W arrantShareit1 StockShareit1 F undShareit1 Intercept N R2 (0.0005) 0.0005 (0.0006) 0.0000 (0.0000) 0.0019** (0.0008) -0.0208*** (0.0078) -0.0099* (0.0052) -0.0191*** (0.0057) -0.0004 (0.0025) -0.0233*** (0.0079) 475,087.00 0.02 (0.0004) 0.0002 (0.0006) -0.0000 (0.0000) 0.0022*** (0.0006) -0.0068 (0.0067) -0.0033 (0.0040) -0.0052* (0.0031) 0.0023 (0.0024) -0.0224*** (0.0051) 474,943.00 0.01

Panel B: Stocks in portfolio T urnoverStocks,it ClusteringStocks,it DispositionStocks,it LeaderShareStocks,it F orecastingStocks,it HomeBiasStocks,it1 LocalBiasStocks,it1 LotteryP refit1 N onLotteryP refit1 N ormV arStocks,it1 RM RF,M SCI,it1 SM B,M SCI,it1 HM L,M SCI,it1 Sexi Agei M arriedi RiskClassi HasP hDi IsGermani Experienceit1 P ortV alit1 0.0001 (0.0002) -0.0017*** (0.0004) 0.0002** (0.0001) -0.0002 (0.0002) 0.0004** (0.0002) -0.0009 (0.0013) 0.0003* (0.0002) -0.0034*** (0.0008) 0.0034*** (0.0012) -0.0043*** (0.0005) 0.0307** (0.0131) 0.0000 (0.0034) -0.0005 (0.0020) -0.0012* (0.0007) -0.0000 (0.0000) -0.0002 (0.0003) -0.0006** (0.0003) 0.0014** (0.0006) -0.0004 (0.0007) 0.0000 (0.0000) 0.0021** (continued) 0.0001 (0.0002) -0.0011*** (0.0002) 0.0001* (0.0001) -0.0001 (0.0001) 0.0004*** (0.0001) -0.0009 (0.0008) 0.0002 (0.0001) -0.0031*** (0.0005) 0.0025*** (0.0005) -0.0016*** (0.0003)

-0.0005 (0.0007) -0.0000* (0.0000) 0.0003 (0.0002) -0.0003 (0.0002) 0.0004 (0.0004) 0.0004 (0.0006) -0.0000 (0.0000) 0.0027***

79

(continued) Intercept N R2 (0.0010) -0.0403*** (0.0129) 411,905.00 0.02 (0.0007) -0.0279*** (0.0070) 412,661.00 0.01

Panel C: Funds in portfolio T urnoverF unds,it ClusteringF unds,it DispositionF unds,it LeaderShareF unds,it F orecastingF unds,it T rendChasingF unds,it HomeBiasF unds,it1 LocalBiasF unds,it1 N ormV arF unds,it1 Sexi Agei M arriedi RiskClassi HasP hDi IsGermani Experienceit1 P ortV alit1 Intercept N R2 -0.0002 (0.0002) -0.0002 (0.0002) -0.0000 (0.0001) -0.0001 (0.0001) 0.0005* (0.0003) -0.0008** (0.0004) -0.0003 (0.0003) -0.0000 (0.0001) -0.0004 (0.0006) -0.0005 (0.0007) -0.0000 (0.0000) 0.0001 (0.0002) 0.0001 (0.0002) 0.0001 (0.0004) 0.0006 (0.0004) 0.0000 (0.0000) 0.0004 (0.0008) -0.0052 (0.0079) 267,929.00 0.00 0.0001 (0.0001) 0.0001 (0.0001) 0.0000 (0.0000) -0.0001** (0.0001) 0.0002 (0.0002) 0.0003 (0.0002) -0.0002 (0.0002) -0.0001 (0.0000) -0.0002 (0.0004) -0.0001 (0.0004) 0.0000 (0.0000) -0.0001 (0.0001) 0.0003** (0.0001) -0.0000 (0.0002) -0.0002 (0.0003) 0.0000 (0.0000) -0.0002 (0.0005) 0.0015 (0.0051) 266,272.00 0.00

80

Table B.7: Multivariate analysis of investment behavior and portfolio performance net of transaction costs
This table presents regression analyses identical in setup to those in Table 7. The only dierence is that the performance measures used are net of transaction costs. *, **, and *** denote signicance at the 10%, 5%, and 1% levels, respectively.

Returns Panel A: Entire portfolio T urnoverAll,it ClusteringAll,it DispositionStocks,it DispositionF unds,it LeaderShareAll,it F orecastingAll,it T rendChasingF unds,it HomeBiasStocks,it1 HomeBiasF unds,it1 LocalBiasStocks,it1 LocalBiasF unds,it1 LotteryP refit1 N onLotteryP refit1 N ormV arAll,it1 RM RF,CDAX,it1 SM B,CDAX,it1 HM L,CDAX,it1 M OM,CDAX,it1 Sexi Agei M arriedi RiskClassi HasP hDi IsGermani Experienceit1 P ortV alit1 OptionShareit1 -0.0011*** (0.0002) -0.0013*** (0.0003) 0.0001 (0.0001) -0.0002*** (0.0001) -0.0001 (0.0001) 0.0001 (0.0001) -0.0002 (0.0003) 0.0010 (0.0007) -0.0008** (0.0003) 0.0000 (0.0002) 0.0000 (0.0001) -0.0024*** (0.0004) 0.0010 (0.0006) -0.0012*** (0.0003) -0.0054 (0.0035) -0.0086*** (0.0028) 0.0130*** (0.0038) -0.0022 (0.0068) -0.0006 (0.0008) -0.0000 (0.0000) -0.0001 (0.0002) -0.0004 (0.0003) 0.0002 (0.0005) -0.0007 (0.0008) 0.0000 (0.0000) 0.0021** (0.0008) -0.0003 (continued)

Alphas

Sharpe ratios

-0.0011*** (0.0002) -0.0008*** (0.0002) 0.0001 (0.0001) 0.0000 (0.0001) -0.0000 (0.0001) 0.0001 (0.0001) 0.0002 (0.0002) -0.0003 (0.0007) -0.0002 (0.0002) 0.0001 (0.0001) 0.0001 (0.0001) -0.0030*** (0.0004) 0.0011** (0.0004) -0.0014*** (0.0004)

-0.0029*** (0.0006) -0.0023*** (0.0007) 0.0003 (0.0003) -0.0002 (0.0004) 0.0002 (0.0004) 0.0011** (0.0005) -0.0017 (0.0011) 0.0032 (0.0021) -0.0023* (0.0012) 0.0008* (0.0004) 0.0001 (0.0003) -0.0055*** (0.0010) 0.0069*** (0.0017) -0.0036*** (0.0011)

-0.0001 (0.0004) -0.0000 (0.0000) 0.0001 (0.0002) -0.0002 (0.0002) 0.0003 (0.0004) -0.0001 (0.0006) -0.0000 (0.0000) 0.0014*** (0.0004) -0.0183***

-0.0032 (0.0022) -0.0001 (0.0001) -0.0004 (0.0008) -0.0013 (0.0008) 0.0002 (0.0015) -0.0017 (0.0019) 0.0000 (0.0000) 0.0082*** (0.0022) -0.0221

81

(continued) W arrantShareit1 StockShareit1 F undShareit1 Intercept N R2 (0.0097) -0.0023 (0.0054) -0.0072* (0.0038) 0.0036 (0.0025) -0.0145** (0.0068) 475,087.00 0.02 (0.0059) -0.0068*** (0.0025) -0.0064*** (0.0023) -0.0002 (0.0018) -0.0118** (0.0047) 474,943.00 0.01 (0.0239) 0.0005 (0.0198) -0.0197 (0.0129) 0.0323** (0.0143) -0.0492** (0.0194) 476,434.00 0.01

Panel B: Stocks in portfolio T urnoverStocks,it ClusteringStocks,it DispositionStocks,it LeaderShareStocks,it F orecastingStocks,it HomeBiasStocks,it1 LocalBiasStocks,it1 LotteryP refit1 N onLotteryP refit1 N ormV arStocks,it1 RM RF,CDAX,it1 SM B,CDAX,it1 HM L,CDAX,it1 M OM,CDAX,it1 Sexi Agei M arriedi RiskClassi HasP hDi IsGermani Experienceit1 P ortV alit1 Intercept N R2 -0.0015*** (0.0003) -0.0011*** (0.0002) 0.0002** (0.0001) -0.0003 (0.0002) 0.0004* (0.0002) 0.0020 (0.0012) 0.0002 (0.0002) -0.0036*** (0.0006) 0.0019* (0.0010) -0.0027*** (0.0004) -0.0056 (0.0042) -0.0049 (0.0030) 0.0100*** (0.0033) -0.0007 (0.0067) -0.0012 (0.0010) -0.0000 (0.0000) -0.0000 (0.0003) -0.0006** (0.0003) 0.0013** (0.0006) -0.0013* (0.0007) 0.0000 (0.0000) 0.0026** (0.0012) -0.0222** (0.0102) -0.0012*** (0.0002) -0.0010*** (0.0002) 0.0000 (0.0001) -0.0001 (0.0001) 0.0003* (0.0002) -0.0001 (0.0009) 0.0001 (0.0001) -0.0028*** (0.0005) 0.0011** (0.0005) -0.0013*** (0.0003) -0.0036*** (0.0006) -0.0018*** (0.0006) 0.0003 (0.0003) 0.0000 (0.0003) 0.0013*** (0.0005) 0.0056* (0.0029) 0.0007* (0.0004) -0.0066*** (0.0015) 0.0092*** (0.0021) -0.0077*** (0.0016)

-0.0005 (0.0005) -0.0000*** (0.0000) 0.0003 (0.0003) -0.0002 (0.0002) 0.0008 (0.0005) -0.0000 (0.0007) -0.0000 (0.0000) 0.0019*** (0.0005) -0.0193*** (0.0057)

-0.0043* (0.0022) -0.0001 (0.0001) -0.0007 (0.0006) -0.0018*** (0.0006) 0.0027** (0.0014) -0.0033* (0.0018) -0.0000 (0.0000) 0.0080*** (0.0024) -0.0521*** (0.0201) 411,920.00 0.01

411,905.00 412,661.00 0.01 0.01 (continued)

82

(continued) Panel C: Funds in portfolio T urnoverF unds,it ClusteringF unds,it DispositionF unds,it LeaderShareF unds,it F orecastingF unds,it T rendChasingF unds,it HomeBiasF unds,it1 LocalBiasF unds,it1 N ormV arF unds,it1 RM RF,CDAX,it1 SM B,CDAX,it1 HM L,CDAX,it1 M OM,CDAX,it1 Sexi Agei M arriedi RiskClassi HasP hDi IsGermani Experienceit1 P ortV alit1 Intercept N R2 -0.0012*** (0.0002) -0.0001 (0.0001) 0.0000 (0.0001) -0.0001 (0.0001) 0.0005** (0.0002) 0.0003 (0.0003) -0.0007** (0.0003) -0.0002** (0.0001) 0.0010** (0.0004) -0.0030 (0.0041) -0.0231** (0.0092) 0.0274** (0.0129) -0.0129 (0.0217) -0.0005 (0.0007) -0.0000 (0.0000) 0.0002 (0.0002) 0.0004* (0.0002) -0.0005 (0.0004) 0.0003 (0.0005) 0.0000 (0.0000) 0.0000 (0.0008) 0.0051 (0.0064) 267,929.00 0.03 -0.0009*** (0.0001) 0.0001 (0.0001) 0.0000 (0.0000) -0.0001 (0.0000) 0.0002 (0.0002) 0.0003 (0.0002) -0.0002 (0.0002) -0.0000 (0.0000) -0.0002 (0.0004) -0.0084*** (0.0009) 0.0004 (0.0009) 0.0002 (0.0004) -0.0004 (0.0003) 0.0033*** (0.0011) -0.0017 (0.0012) 0.0001 (0.0011) -0.0003 (0.0004) -0.0027* (0.0014)

-0.0002 (0.0004) 0.0000 (0.0000) -0.0001 (0.0001) 0.0003* (0.0001) -0.0000 (0.0002) -0.0002 (0.0003) 0.0000 (0.0000) -0.0001 (0.0005) 0.0001 (0.0051) 266,272.00 0.00

-0.0024 (0.0031) -0.0002** (0.0001) 0.0019* (0.0011) 0.0017 (0.0012) -0.0024 (0.0023) 0.0006 (0.0028) -0.0000 (0.0000) 0.0042 (0.0034) -0.0000 (0.0279) 267,883.00 0.00

83

Table B.8: Annualized performance impact of investment behavior when using net returns
This table presents three measures of return premiums or penalties associated with various proxies for investment behavior. The rst measure is the performance eect associated with decreasing a certain investment behavior by one standard deviation. It is estimated using the annualized coecient from the regression of the full portfolios net returns on behavior proxies, portfolio betas, and control variables reported in Table B.7. Since these standard deviations dier greatly across measures, the next column reports the annualized change in portfolio return associated with a 10% decrease in the behavior with respect to the sample mean. The last column reports the hypothetical return gain associated with eliminating the behavior altogether. Mean - X - 1 Std. Dev. T urnoverAll,it LeaderShareAll,it HomeBiasStocks,it1 HomeBiasF unds,it1 LocalBiasStocks,it1 LocalBiasF unds,it1 ClusteringAll,it LotteryP refit1 N onLotteryP refit1 DispositionStocks,it DispositionF unds,it N ormV arAll,it1 F orecastingAll,it T rendChasingF unds,it 0.0165 0.0019 -0.0068 -0.0020 -0.0004 0.0001 0.0130 0.0318 -0.0051 -0.0010 0.0008 0.0066 -0.0026 -0.0065 - 10% 0.0008 0.0001 -0.0056 -0.0005 -0.0001 0.0000 0.0023 0.0027 -0.0009 -0.0002 0.0001 0.0036 -0.0002 -0.0018 mean 0 0.0081 0.0010 -0.0562 -0.0053 -0.0006 0.0000 0.0225 0.0328 -0.0196 -0.0015 0.0005 0.0357 0.0023 -0.0073

84

Table B.9: Annualized performance dierences between investors sorted into combined investment behavior quintiles
This table presents the average full portfolios performance for investors, sorted into quintiles on a combined investment behavior measure. The measure is constructed by adding up all (standardized) investment behavior proxies negatively associated with full portfolio returns in the regression in Table 7. Investment behavior proxies positively associated with returns are subtracted. Performance measures are annualized (for simplicity, monthly Sharpe ratios are multiplied by the square root of 12). 1 ReturnF ull AlphaCDAX,F ull Sharpe RatioF ull -0.020 -0.005 0.099 2 -0.033 -0.016 0.086 3 -0.049 -0.026 0.073 4 -0.070 -0.037 0.059 5 -0.101 -0.066 0.044

85

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