In their April 2003 paper entitled “Systematic Noise”, Brad Barber, Terrance Odean and Ning Zhu investigate the degree to which the trading behaviors of individual investors are systematic and herd-like. Using samples of 66,465 investors at a large national discount broker and 665,533 investors at a large retail broker, they find that:
- Within a given month, buying and selling activities are highly correlated, probably attention-driven, across individual investors.
- Individual investors are net buyers of stocks with unusually high trading volumes and very recent extreme negative and positive returns, perhaps because those stocks catch their attention.
- If individual investors are net buyers of a stock this month, they are likely to be net buyers of the stock in coming months.
- Individual investors buy and sell stocks with strong past returns. When buying, overextrapolation of strong past returns in individual stocks leads individual investors to buy the same stocks. When selling, the dominant behavioral factor is avoidance of the regret associated with sale of a losing investment. Individual investors therefore sell winners rather than losers.
In summary, individual investors systematically show attention-driven herd-like behaviors.
