Terrance Odean talks with
ScienceWatch.com and answers a few questions about
this month's Fast Breaking Paper in the field of Economics
& Business.
Article Title: All that glitters: The effect of
attention and news on the buying behavior of individual and
institutional investors
Authors: Barber,
BM;Odean,
T
Journal: REV FINANC STUD
Volume: 21
Issue: 2
Page: 785-818
Year: APR 2008
* Univ Calif Berkeley, Haas Sch Business, Berkeley, CA
94720 USA.
* Univ Calif Berkeley, Haas Sch Business, Berkeley, CA
94720 USA.
* Univ Calif Davis, Grad Sch Management, Davis, CA 95616
USA.
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.
"Much of my research documents mistakes commonly
made by individuals when investing and estimates
the cost of these mistakes."
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 Web