Why Do (Some) Households Trade So Much?

Abstract

When agents can learn about their abilities as active investors, they rationally “trade to learn” even if they expect to lose from active investing. The model used to develop this insight draws conclusions that are consistent with empirical study of household trading behavior: Households' portfolios underperform passive investments; their trading intensity depends on past performance; and they begin by trading small sums of money. Using household data from Finland, the article estimates a structural model of learning and trading. The estimated model shows that investors trade to learn even if they are pessimistic about their abilities as traders. It also demonstrates that realized returns are significantly downward-biased measures of investors' true abilities.