Amateur Investors Are 3.2 Percent Worse Than Chimpanzees At Picking Stocks

A lot has been written on the madness of amateur investors thinking they can pick stocks better than the professionals.

And we've all seen the chart of investor psychology, which shows why people buy at the top and sell at the bottom.

But to really appreciate just how bad amateur investors are at stock-picking, consider the findings of a famous study by UC Berkeley's Terry Odean. Here's how it was described in Thinking, Fast And Slow by Daniel Kahneman:

Odean began by studying the trading records of 10,00 brokerage accounts of individual investors spanning a seven-year period. He was able to analyze every transaction the investors executed through that firm, nearly 163,000 trades. This rich set of data allowed Odean to identify all instances in which an investor sold some of his holdings in one stock and soon after bought another stock. By these actions the investor revealed that he (most of the investors were men) had a definite idea about the future of the two stocks: he expected the stock that he chose to buy to do better than the stock he chose to sell.

To determine whether those ideas were well founded, Odean compared the returns of the stock the investor had sold and the stock he had bought in its place, over the course of one year after the transaction. The results were unequivocally bad. On average the shares that individual traders sold did better than those they bought, by a very substantial margin: 3.2 percentage points per year, above and beyond the significant costs of executing the two trades.

Yikes.

If the average investor had any insight, the stocks he bought would outperform the stocks he sold.

If his picks were totally random — as if done by a chimpanzee throwing darts — then the stocks he bought would perform similarly to the ones he sold.

But in fact, the stocks bought by the average investor performed 3.2 percent worse than stocks he sold.

And that's not taking into account the cost of executing the trades. See, not only does the average investor trade better stocks for worse, but he also pays to do it.

Writes Kahneman: "It is clear that for the large majority of individual investors, taking a shower and doing nothing would have been a better policy than implementing the ideas that came to mind."

Now read about the wisdom of low-cost index funds >



More From Business Insider

--

Get stories like this on the Yahoo app and discover more every day.
Download it now.
Loading...
  • Ten more Turkish tanks head across border into Syria
    Ten more Turkish tanks head across border into Syria AFP News - 16 minutes ago

    At least 10 more Turkish tanks on Thursday crossed the border into Syria a day after pro-Ankara Syrian opposition fighters ousted jihadists from the town of Jarabulus, an AFP photographer said. The tanks were set to join around a dozen others which … More »

  • Bold moves, tepid gains: Have central banks met their limit?
    Bold moves, tepid gains: Have central banks met their limit? Associated Press - 21 minutes ago

    The world's key central banks have worked themselves into contortions to try to rev up economic growth, raise inflation and coax consumers and businesses to borrow and spend more. They've pumped trillions ... … More »

  • WHY IT MATTERS: Trade Associated Press - 25 minutes ago

    THE ISSUE: In this angry election year, many American voters are deeply skeptical about free trade — or downright hostile to it. The backlash against trade threatens a pillar of U.S. policy since World ... … More »

  • PBOC Money-Market Tactic Has Traders Trying to Decode Signal (3) Bloomberg - 29 minutes ago

    The People’s Bank of China sold 50 billion yuan ($7.5 billion) of 14-day reverse-repurchase agreements on Wednesday, its first offering of anything with a tenor other than seven days since February. Officials are signaling they’re ready to curb … More »

  • Dollar Rally Fades Away Before Yellen as European Stocks Retreat Bloomberg - 32 minutes ago

    European stocks fell for the first time this week. The Bloomberg Dollar Spot Index snapped a four-day winning streak that was fueled by hawkish comments from Fed officials, while the Stoxx Europe 600 Index retreated from a one-week high. … More »

  • European stocks dip at open AFP - 34 minutes ago

    Europe's main stock markets fell at the start of trade on Thursday, with London's benchmark FTSE 100 index down 0.4 percent to 6,810.08 points. Frankfurt's DAX 30 also lost 0.4 percent to 10,576.56 points ... … More »

  • Oil prices dip as focus returns to global supply overhang
    Oil prices dip as focus returns to global supply overhang Reuters - 42 minutes ago

    Oil prices dipped on Thursday, extending the previous day's decline, as the market focus returned to a global supply overhang, although a surprise fall in Chinese crude inventories did lend some support. U.S. West Texas Intermediate (WTI) crude … More »

  • Korea’s 50-Year Bond Shows Aging Investors Want Mature Debt (2) Bloomberg - 43 minutes ago

    China and Thailand have already started issuing 50-year debt, and there is speculation Japan will do the same. The United Nations forecasts the ratio of people in Asia over 60 will more than double by 2050, led by Japan to 41 percent of the … More »

  • Asia energy stocks hit by oil sell-off, eyes on Yellen
    Asia energy stocks hit by oil sell-off, eyes on Yellen AFP News - 43 minutes ago

    Asian energy firms suffered further losses Thursday after another sharp fall in oil prices, while currency traders moved cautiously the day before a key speech by Federal Reserve boss Janet Yellen. World markets have struggled to gain traction this … More »

  • Alipay Owner Said to Plan Hong Kong IPO in First Half of 2017 Bloomberg - 44 minutes ago

    Mainland China’s restrictions on stock options are discouraging Zhejiang Ant Small & Micro Financial Services Group Co. from its original plans for the dual listing, said the people, asking not to be named because the matter is private. A Shanghai … More »

  • China's CNOOC reports $1.16 bn net loss
    China's CNOOC reports $1.16 bn net loss AFP News - 51 minutes ago

    China's main offshore oil and gas producer CNOOC saw its shares on the Hong Kong stock exchange fall on Thursday, after it reported a $1.16 billion net loss for the first half of 2016. It was the company's first half-year loss since it started … More »

  • Oil prices turn higher as dealers eye output talks AFP - 1 hour 1 minute ago

    Oil prices turned higher in Asian trade Thursday, a day after suffering hefty losses in response to data showing a surprise jump in US stockpiles, while hopes for a deal to limit output were dealt a blow. ... … More »

  • Essentra to sell clean wipes business in 220-million-pound deal Reuters - 1 hour 1 minute ago

    The company, which is a supplier of speciality plastic and packaging components, said it expected conditions to close the Porous Technologies deal to be satisfied by the first quarter of 2017. Essentra, which has warned on results twice this year, … More »

  • Indonesian navy finds fuel tanker taken by own crew
    Indonesian navy finds fuel tanker taken by own crew AFP News - 1 hour 4 minutes ago

    Indonesia's navy said on Thursday it had found a tanker carrying almost $400,000 worth of diesel that was taken by its own crew last week due to a commercial dispute. The MT Vier Harmoni was initially feared to have been hijacked after setting sail … More »

  • Korea Encourages Stricter Loan Screening Amid Record Debt (1) Bloomberg - 1 hour 6 minutes ago

    The pace of household debt has accelerated in recent years as the Bank of Korea lowered rates to unprecedented levels and the government eased property regulations to support the economy. The booming property market has played a key role in … More »

  • Playtech to pay 150 million euros as special dividend Reuters - 1 hour 10 minutes ago

    (Reuters) - Gambling technology company Playtech Plc said on Thursday it would return 150 million euros (£127.87 million) to shareholders through a special dividend after reporting an 18 percent jump in ... … More »

  • Mobius Says Helicopter Money Will Be Japan’s Next Big Experiment Bloomberg - 1 hour 18 minutes ago

    Haruhiko Kuroda decides to act. Helicopter money is coming, says Mark Mobius, even as soon as next month. For Mobius, executive chairman of Templeton Emerging Markets Group, traditional easing measures have just made people save instead of spend … More »

  • Asia stocks hold gains before Yellen speech, dollar firm
    Asia stocks hold gains before Yellen speech, dollar firm Reuters - 1 hour 46 minutes ago

    Asian stocks edged higher on Thursday but clung to recent well-worn trading ranges while the dollar held firm against regional currencies ahead of a speech by Federal Reserve Chair Janet Yellen at a global central bankers' meeting. MSCI's broadest … More »

  • Huge losses at Australian retail giant Woolworths
    Huge losses at Australian retail giant Woolworths AFP News - 2 hours 19 minutes ago

    Australian supermarket giant Woolworths on Thursday reported a large annual net loss of Aus$1.23 billion (US$940 million), its first since listing more than two decades ago, following a failed push into hardware and a slump in food sales. … More »

  • Maybank Posts Third Straight Profit Drop on Loan Impairments (1) Bloomberg - 2 hours 26 minutes ago

    Net income fell to 1.16 billion ringgit ($288 million) in the three months through June from 1.58 billion ringgit a year earlier, the Kuala Lumpur-based company said in a stock exchange filing on Thursday. Maybank reiterated its “vigilance” over … More »

  • SE Asia Stocks-Lacklustre ahead of Yellen speech Reuters - 2 hours 34 minutes ago

    By Krishna V Kurup Aug 25 (Reuters) - Southeast Asian stock markets were lacklustre on Thursday after an overnight drop on Wall Street, while the dollar rose ahead of a speech by Federal Reserve Chair ... … More »

  • Clean air but murky policy as Yellen speech awaited
    Clean air but murky policy as Yellen speech awaited AFP News - 2 hours 49 minutes ago

    If US Federal Reserve chief Janet Yellen chooses to use her closely watched address on Friday to clear the air, she will have plenty of clearing to do. Yellen, who will address a ballyhooed annual gathering of central bankers in the crisp climate … More »

  • Galaxy’s Profit Beats Estimates as New Resorts Woo Tourists (1) Bloomberg - 2 hours 51 minutes ago

    Adjusted earnings before interest, taxes, depreciation and amortization, or adjusted Ebitda, was HK$2.3 billion ($297 million), compared with the HK$2.25 billion median estimate of five analysts surveyed by Bloomberg. Galaxy, Macau’s largest casino … More »

  • Oil prices extend losses as dealers eye output talks AFP - 3 hours ago

    Oil prices edged down again in Asian trade Thursday, a day after suffering hefty losses in response to data showing a surprise jump in US stockpiles, while hopes for a deal to limit output were dealt a ... … More »

  • Aluminium giant Rusal reports 70% net profit plunge AFP - 3 hours ago

    Russian aluminium giant Rusal said Thursday net profit fell 70 percent in the first half of 2016, as weaknesses in global commodities markets keeps prices depressed. The cost of aluminium sank to six-year ... … More »

 
Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
 
Sign-in to view quotes in your portfolios.

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    0.1290.0000.00%
    N21.SI
    0.605+0.005+0.83%
    5TP.SI
    0.990.000.00%
    Y92.SI
    0.360.00-1.37%
    E5H.SI
    1.04-0.04-3.70%
    OV8.SI
  • % Gainers
    % Gainers
    NamePriceChange% Chg
    0.45+0.09+26.76%
    AYB.SI
    0.47+0.09+22.08%
    E8Z.SI
    0.34+0.03+11.48%
    41A.SI
    0.605+0.055+10.00%
    BDR.SI
    0.71+0.05+7.58%
    BTE.SI
  • % Losers
    % Losers
    NamePriceChange% Chg
    0.13-0.02-15.58%
    RF7.SI
    0.26-0.04-13.33%
    BDU.SI
    0.33-0.05-13.16%
    AYV.SI
    0.20-0.03-13.04%
    AWI.SI
    0.40-0.06-13.04%
    BBW.SI

Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    1.3523-0.0014-0.11%
    USDSGD=X
    1.5251+0.0002+0.01%
    EURSGD=X
    1.7871-0.0035-0.20%
    GBPSGD=X
    74.2350+0.092+0.12%
    SGDJPY=X
    5.7325+0.0089+0.16%
    SGDHKD=X
    2.9738-0.0031-0.10%
    SGDMYR=X
    9,801.0908+17.8496+0.18%
    SGDIDR=X
    4.9237+0.0104+0.21%
    SGDCNY=X
    1.0311+0.0004+0.04%
    AUDSGD=X
  • Commodities
    Commodities
    NamePriceChange% Chg
    1,329.20-0.50-0.04%
    GCZ16.CMX
    18.58+0.02+0.13%
    SIU16.CMX
    95.34-8.55-8.23%
    ^XAU
    2.08+0.01+0.29%
    HGU16.CMX
    46.84+0.07+0.15%
    CLV16.NYM
  • Bonds
    Bonds
    TreasuryYield (%)Yield Change
    1.140.00
    ^FVX
    1.56+0.01
    ^TNX
    2.24+0.01
    ^TYX