Trading performance, disposition effect, overconfidence, representativeness bias, and experience of emerging market investors

TLDR

The study investigates how Chinese investors make investment decisions in an emerging market. Using brokerage account data from China, the authors analyze trading behavior. Chinese investors exhibit poor trading outcomes, consistently underperforming on purchased stocks, and display strong disposition effect, overconfidence, and representativeness bias—more pronounced than in U.S. investors—while experience does not reliably mitigate these biases.

Abstract

Abstract Using brokerage account data from China, we study investment decision making in an emerging market. We find that Chinese investors make poor trading decisions: the stocks they purchase underperform those they sell. We also find that Chinese investors suffer from three behavioral biases: (i) they tend to sell stocks that have appreciated in price, but not those that have depreciated in price, consistent with a disposition effect, acknowledging gains but not losses; (ii) they seem overconfident; and (iii) they appear to believe that past returns are indicative of future returns (a representativeness bias). In comparisons to prior findings, Chinese investors seem more overconfident than U.S. investors (i.e., the Chinese hold fewer stocks, yet trade very often) and their disposition effect appears stronger. Finally, we categorize Chinese investors based on proxy measures of experience and find that “experienced” investors are not always less prone to behavioral biases than are “inexperienced” ones. Copyright © 2007 John Wiley & Sons, Ltd.