The Sheep of Wall Street: Correlated Trading and Investment Performance
2016
We find that individual investors tend to trade in the same direction with other individual investors in the same branch of their broker. Individual investors’ tendency to herd within the same broker branch is persistent and negatively associated with their cognitive abilities and trading experience. The higher the herding tendency of an individual investor, the worse she performs in her investments. Importantly, the negative association between herding and investment performance is driven by the orders that are traded in the same direction with other individual investors. Our results suggest that herding induces a direct cost for the individual investors.
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