Working Paper: NBER ID: w25838
Authors: Yosef Bonaparte; Russell Cooper; Mengli Sha
Abstract: Barber and Odean (2000) find that households who trade more have a lower net return than others and attribute this pattern to irrationality, particularly overconfidence. In contrast, we find that household financial choices generated from a dynamic optimization problem with rational agents and portfolio adjustment costs can reproduce the observed pattern of households with large turnover having lower net returns. Various forms of irrationality, modeled as beliefs about income and return processes that are not data based, do not improve the ability of the baseline model to explain these turnover and net returns patterns.
Keywords: trading frequency; net returns; rational agents; portfolio adjustment costs; irrationality
JEL Codes: E03; E21; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trading costs (F12) | net returns (D33) |
| income shocks (J65) | trading behavior (G41) |
| trading behavior (G41) | net returns (D33) |
| irrational beliefs (D91) | trading behavior (G41) |
| irrational beliefs (D91) | net returns (D33) |