Working Paper: NBER ID: w11426
Authors: John R. Graham; Campbell R. Harvey; Hai Huang
Abstract: People are more willing to bet on their own judgments when they feel skillful or knowledgeable (Heath and Tversky (1991)). We investigate whether this "competence effect" influences trading frequency and home bias. We find that investors who feel competent trade more often and have a more internationally diversified portfolio. We also find that male investors, and investors with higher income or more education, are more likely to perceive themselves as competent investors than are female investors, and investors with lower income or less education. Our results are unlikely to be explained by other hypotheses, such as overconfidence or information advantage. Finally, we separately establish a link between optimism towards the home market and international portfolio diversification.
Keywords: Investor Competence; Trading Frequency; Home Bias
JEL Codes: G11; G15; F30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Demographic factors (gender, education, income) (J21) | Perceived investor competence (G41) |
| Overconfidence or information advantage (D83) | Trading frequency (G14) |
| Overconfidence or information advantage (D83) | Home bias (F14) |
| Perceived investor competence (G41) | Trading frequency (G14) |
| Perceived investor competence (G41) | Home bias (F14) |