Technical analysis and individual investors

• Published in: Journal of economic behavior & organization 2014-11, Vol.107, p.487-511
• Main Authors: Hoffmann, Arvid O.I., Shefrin, Hersh
• Format: Article
• Language: English
• Subjects: Behavioral finance; Decision analysis; Household finance; Individual investors; Investments; Investor behavior; Investor performance; Investors; Options trading; Rates of return; Risk exposure; Speculation; Statistical analysis; Studies; Technical analysis
• ISSN: 0167-2681; 1879-1751
• DOI: 10.1016/j.jebo.2014.04.002

•Individual investors’ use of technical analysis has been a neglected topic.•Investors using technical analysis experience greater turnover and lower returns.•Technical analysis and frequent options trading give rise to very poor returns.•Investors using technical analysis select more concentrated portfolios.•Male investors use technical analysis more than female investors. 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.