Uninformative Feedback and Risk Taking: Evidence from Retail Forex Trading
We document evidence consistent with retail day traders in the Forex market attributing random success to their own skill and, as a consequence, increasing risk taking. Although past performance does not predict future success for these traders, traders increase trade sizes, trade size variability, and number of trades with gains, and less with losses. There is a large discontinuity in all of these trading variables around zero past week returns: e.g., traders increase their trade size dramatically following winning weeks, relative to losing weeks. The effects are stronger for novice traders, consistent with more intense “learning” in early trading periods.
We benefited from the comments of David Hirshleifer. We thank exp(capital) for providing the data for the project. The authors appreciate comments received from participants in seminars at Notre Dame University, The Ohio State University, and the University of Washington, as well as participants at the Behavioral Finance Conference at Erasmus University (Rotterdam). Ben-David and Birru’s research was supported by the Dice Center at the Fisher College of Business. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Itzhak Ben-David & Justin Birru & Viktor Prokopenya, 2018. "Uninformative Feedback and Risk Taking: Evidence from Retail Forex Trading*," Review of Finance, vol 22(6), pages 2009-2036.