Summary: Session 5: Individual Investors

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• 5 Session 5: Individual Investors

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• Give 3 reasons  Why do we study investor behavior?

  1. Individuals are required to invest: worldwide trend toward defined contribution retirement savings plans.
  
  2 It is easy to invest: the costs of entering the stock market have fallen and the number of individuals investing in equities has increased.
  
  3 Active investing is a zero-sum game: With some notable exceptions, the evidence indicates that individual investors are subpar investors. Individual investors earn poor returns even before costs: many individuals seem to have a desire to trade actively coupled with low security selection ability.

• what are the 2 Retirement savings systems.

  1 Defined benefit (DB) pension systems: - Retirement benefit based on the number of working years and salary. - The employer or pension plan managers invest the savings. - The employer bears the risk of underfunding in case of poor performance.
  
  
  2 Defined contribution (DC) pension systems: - Fixed contribution payments. - Individual participants usually invest their savings (U.S. - 401k plans). - Sometimes collective DC systems. - Individual account: transparency and portability

• What is the definition of not enough diversification?what are three ways in which this unsufficient diversification is manifested? give 2 potential explanations of not sufficient diversification

  Insufficient diversification Definition: investors diversify their portfolio holdings much less than is recommended by normative models of portfolio choice.
  
  Manifestations:
  
  1 Home bias and local investments: - Overweight assets from home country. - Overweight local assets within the same country.
  
  2 Investing in employer’s company: - Enron employees had 62% of their retirement plan assets invested in company stock at the end of 2000.
  
  3 Both outcomes expose investors to idiosyncratic local risk that is likely correlated with their job prospects.         
  
  
  Potential explanations:
  1 Ambiguity aversion and familiarity bias.
  2 Informational advantage.

• What is the finding that Brown, Liang and Weisbenner find with respect to employers investing in their own company?

  Insufficient diversification: investing in employer’s company Brown, Liang and Weisbenner (2006): When the employer match is in company stock, the percent of employees’ own contributions allocated to company stock is 7 to 8 percentage points higher. 
  
  The higher share to company stock comes disproportionately at the expense of the safest asset (money market investments).

• What is Naive diversifcation?

  Naive diversification
  
  Many investors seem to use strategies as simple as allocating 1/n of their savings to each of the n available investment options, whatever those options are.

• Benartzi and Thaler (2001) experiment on allocation decision under three scenarios:what are these three scenario`s?

  Benartzi and Thaler (2001) experiment on allocation decision under three scenarios:
  
  Between a stock fund and a bond fund.
  Between a stock fund and a balanced fund (50% in stocks and 50% in bonds).
  Between a bond fund and a balanced fund.

• Brown, Liang and Weisbenner (2007).they find a relation between what exactly?

  Positive relation across all assets between the share of fund options available in each asset class and the share of contributions made to funds in that asset class.
  
  The increase in the number of options is concentrated in equity funds.

• Excessive trading of individual investorsBarber and Odean (2000) research:  what is their sample and can we say about individual that trade alot

  Large discount brokerage data over 1991-1996 period.
  
  
  Individual who trade the most, perform the worst.

• what is the overconfidence explanation for excessive trading?

  Overconfidence as explanation for excessive trading.
  
  Overconfidence explanation: people believe that they have information strong enough to justify a trade, whereas in fact the information is too weak to warrant any action.

• Grinblatt , Keloharju (2009). what was the data that they collected?what did they try to measure.how did they measure this measurement.what do they find?

  Grinblatt and Keloharju (2009) research:
  
  -  Trading records for investors in Finland.
  -  Measure of each’s trader overconfidence: based on psychological and aptitude tests at age 18, before military service.
  - Overconfidence measure: self-reported confidence level minus how confident you should be based on your test performance.
  - Find a significant link between overconfidence and intensity of trading activity.