Wednesday, March 19, 2014

Technical Analysis and Individual Investors: Kids, Don't Try This At Home

From the Social Science Research Network:

Arvid O. I. Hoffmann

Maastricht University - School of Business and Economics - Department of Finance; Network for Studies on Pensions, Aging and Retirement (Netspar)

Hersh Shefrin

Santa Clara University - Leavey School of Business

February 25, 2014

We find that individual investors who use technical analysis and trade options frequently make poor portfolio decisions, resulting in dramatically lower returns than other investors. The data on which this claim is based consists of transaction records and matched survey responses of a sample of Dutch discount brokerage clients for the period 2000-2006. Overall, our results indicate that individual investors who report using technical analysis are disproportionately prone to have speculation on short-term stock-market developments as their primary investment objective, hold more concentrated portfolios which they turn over at a higher rate, are less inclined to bet on reversals, choose risk exposures featuring a higher ratio of nonsystematic risk to total risk, engage in more options trading, and earn lower returns.

Free Download (67 page PDF)
HT: Abnormal Returns