The Investment Behavior and Performance of Various Investor Types: A Study of Finland's Unique Data Set

TLDR

The study investigates how past returns influence investors’ buying and selling decisions and whether differences in such behavior and investor sophistication affect the performance of various investor types. Using Finnish data, the authors analyze the relationship between past returns and trading propensity. Foreign investors act as momentum traders buying past winners and selling losers, whereas domestic household investors are contrarians; these behavioral patterns persist across multiple return horizons, and foreign investors’ portfolios outperform household portfolios even after accounting for behavior differences.

Abstract

Using data from Finland, this study analyzes the extent to which past returns determine the propensity to buy and sell. It also analyzes whether these differences in past-return-based behavior and differences in investor sophistication drive the performance of various investor types. We find that foreign investors tend to be momentum investors, buying past winning stocks and selling past losers. Domestic investors, particularly households, tend to be contrarians. The distinctions in behavior are consistent across a variety of past-return intervals. The portfolios of foreign investors seem to outperform the portfolios of households, even after controlling for behavior differences.