Working Paper: NBER ID: w29076
Authors: Klakow Akepanidtaworn; Rick Di Mascio; Alex Imas; Lawrence Schmidt
Abstract: Are market experts prone to heuristics, and if so, do they transfer across closely related domains—buying and selling? We investigate this question using a unique dataset of institutional investors with portfolios averaging $573 million. A striking finding emerges: while there is clear evidence of skill in buying, selling decisions underperform substantially—even relative to random selling strategies. This holds despite the similarity between the two decisions in frequency, substance and consequences for performance. Evidence suggests that an asymmetric allocation of cognitive resources such as attention can explain the discrepancy: we document a systematic, costly heuristic process when selling but not when buying.
Keywords: institutional investors; trading performance; heuristics; cognitive biases
JEL Codes: D91; G02; G12; G4; G41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cognitive resources allocation in selling (D91) | selling decisions underperformance (G11) |
| cognitive biases (D91) | trading performance (F17) |
| earnings announcements (G14) | selling decisions performance (G11) |
| asymmetric allocation of cognitive resources (D91) | systematic underperformance in selling (P17) |
| selling assets with extreme prior returns (G12) | neglecting viable investment opportunities (G31) |
| selling decisions underperformance (G11) | overall portfolio returns (G11) |