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Investor Competence, Trading Frequency, and Home Bias

Fuqua School of Business, Duke University, Durham, North Carolina 27708; and National Bureau of Economic Research, Cambridge, Massachusetts 02138
Fuqua School of Business, Duke University, Durham, North Carolina 27708; and National Bureau of Economic Research, Cambridge, Massachusetts 02138
Cornerstone Research Inc., Washington, DC 20006
john.graham{at}duke.edu
cam.harvey{at}duke.edu
hhuang{at}cornerstone.com

People are more willing to bet on their own judgments when they feel skillful or knowledgeable. We investigate whether this "competence effect" influences trading frequency and home bias. We find that investors who feel competent trade more often and have more internationally diversified portfolios. We also find that male investors, and investors with larger portfolios or more education, are more likely to perceive themselves as competent than are female investors, and investors with smaller portfolios or less education. Our paper also contributes to understanding the theoretical link between overconfidence and trading frequency. Existing theories on trading frequency have focused on one aspect of overconfidence, i.e., miscalibration. Our paper offers a potential mechanism for the "better-than-average" aspect of overconfidence to influence trading frequency. In the context of our paper, overconfident investors tend to perceive themselves to be more competent, and thus are more willing to act on their beliefs, leading to higher trading frequency.

Key Words: behavioral finance; investment; competence; ambiguity; stock trading frequency; home bias
History: Received: June 25, 2007; accepted: January 25, 2009.