Why do you think your paper is highly cited?

I believe that our paper is highly cited because it is one of the first papers to point out the influence of limited attention on financial decisions made both by individual and institutional investors.

Does it describe a new discovery, methodology, or synthesis of knowledge?

The methodology is not new nor is the observation that humans have limited attention. What is new is our theoretical prediction and empirical evidence for how limited attention affects investor behavior.

Would you summarize the significance of your paper in layman's terms?

Investors face hundreds or thousands of choices when they decide to purchase a common stock. Limited time and attention prevent investors from considering all of these choices. While computers can reduce the effects of limited attention, many investors do not use computers to determine their stock selections.

Investors are not likely to buy a stock that they don't consider buying and since they cannot give consideration to each possible stock they tend to choose from the subset of stocks that catch their attention. Preferences matter but only after attention has limited the choice set. Thus, attention might reduce the choice set from 5,000 or 10,000 stocks to five or ten stocks and then preferences will determine which of the five or ten stocks are purchased.

For individual investors, selling is not as affected by attention. That is because most individuals hold relatively small portfolios (e.g., three or four stocks) and only sell stocks that they already own. An individual who wants to sell a stock and only owns four stocks can easily consider each of these four.

Institutional investors are not as constrained by the limits of attention. They routinely use computers to screen stocks; they devote much of their working day to managing their portfolios; and they often work in teams.

Furthermore, there is less asymmetry between buying and selling for institutional investors since they often own many stocks in their portfolios and some institutional investors, such as hedge funds, routinely sell stocks short that they don't already own.

How did you become involved in this research, and were there any problems along the way?

I chose to get a Ph.D. in finance because I wanted to study the effects of decision-making biases on investors and financial markets. The first big challenge to doing empirical studies was to find a brokerage firm willing to share investor trading and position data with me.

Where do you see your research leading in the future?

I plan to continue studying investor behavior as well as its implications for financial markets.

Do you foresee any social or political implications for your research?

Increasingly in the US and elsewhere, individuals are expected to make financial decisions that will determine their future welfare. Decisions that were once made by professional investors, e.g., the portfolio investment decisions in a defined benefit pension plan, must now be made by individuals, e.g., portfolio decisions in a defined contribution plan such as a 401(k) plan.

Much of my research documents mistakes commonly made by individuals when investing and estimates the cost of these mistakes. I hope that this research can help educators to better prepare people for investing, help financial advisors to counsel clients, and help policymakers to design systems that encourage investors to make good decisions.

Terrance Odean, Ph.D.
Rudd Family Foundation Professor of Finance
Haas School of Business
University of California, Berkeley
Berkeley, CA, USA
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KEYWORDS: TRADING VOLUME; TRADERS; DIVERGENCE; OPINION; PRICE.