Resolving the Excessive Trading Puzzle: An Integrated Approach Based on Surveys and Transactions
The behavioral finance literature has provided over a dozen explanations for the so-called excessive trading puzzle – retail investors trade a lot even though more trading hurts their performance. It is difficult to use transaction data to differentiate these explanations as they share similar predictions by design. To confront this challenge, we design and administer a nation-wide survey among retail investors to elicit their responses to an exhaustive list of trading motives. By merging survey responses with account-level transaction data, we validate survey responses with actual trading behaviors and compare the power of survey-based and transaction-based measures of trading motives. A horse race among survey-based trading motives suggests that overconfidence in having information advantage and gambling preference quantitatively dominate other explanations. Moreover, other popular arguments such as neglect of trading cost do not contribute to excessive trading.
We thank Jingxuan Chen and Zi Ye for able research assistance. We are grateful to Lawrence Jin, and seminar participants at Baruch, Chapman, CUHK Shenzhen, Imperial College, LSE, and Princeton for helpful feedback. Cameron Peng acknowledges financial support from the Paul Woolley Centre at LSE. Wei A. Xiong acknowledges support from the National Natural Science Foundation of China (Project Number 71703104). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.