# Individual Investors Lose 3.8 Percentage Points Annually to Active Trading

Cite as: Gorak, R. (2026). Individual Investors Lose 3.8 Percentage Points Annually to Active Trading. Tradicted. https://www.tradicted.com/research/barber-individual-2009/
Paper: Brad M. Barber and Yi-Tsung Lee and Yu-Jane Liu and Terrance Odean — *Just How Much Do Individual Investors Lose by Trading?*
Published in: Review of Financial Studies (2009)
Original: https://faculty.haas.berkeley.edu/odean/papers%20current%20versions/justhowmuchdoindividualinvestorslose_rfs_2009.pdf

Key finding: The aggregate portfolio of individual investors on the Taiwan Stock Exchange suffered an annual performance penalty of 3.8 percentage points from 1995 to 1999, equivalent to 2.2% of Taiwan's GDP, with virtually all losses traceable to aggressive orders.

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Active retail trading imposes systematic, economically large costs on individual investors. Turnover on the Taiwan Stock Exchange averaged nearly 300% annually—two to three times U.S. rates during the same period. Barber, Lee, Liu, and Odean (2009), in "Just How Much Do Individual Investors Lose by Trading?", studied 3.9 million investors from 1995 to 1999. The aggregate individual investor portfolio lost 3.8 percentage points in annual return; total losses of $NT 935 billion equaled 2.2% of Taiwan's GDP.

## What the Study Found

Individual investors lost $NT 35.3 million daily at a one-day horizon and $NT 178.7 million daily at a 140-day horizon. Of all trades, 64% emanated from aggressive orders, and virtually all individual investor losses traced to those aggressive trades. Passive individual trades generated short-run profits that eroded to zero by 25 to 140 trading days. Institutions earned annual abnormal returns of 1.5 percentage points after commissions and transaction taxes. Foreign institutions captured 46.2% of total institutional trading and market-timing gross profits at a six-month horizon.

## Methodology

The dataset is the complete Taiwan Stock Exchange transaction history from January 1, 1995 through December 31, 1999. The sample included approximately 3.9 million individual investors, 24,000 corporations, 83 dealers, 1,600 foreigners, and 289 mutual funds. Dollar profits used calendar-time portfolios mimicking net daily purchases and sales at holding periods of 1, 10, 25, and 140 trading days. Abnormal returns were estimated with a four-factor model controlling for market, size (SMB), value (HML), and momentum (WML).

## Key Statistics

| Metric | Finding | Context |
|---|---|---|
| Annual return penalty for individual investors | 3.8 percentage points | Aggregate individual portfolio, Taiwan Stock Exchange 1995–1999 |
| Total individual investor losses | $NT 935 billion ($US 32 billion) | Taiwan Stock Exchange, 1995–1999 |
| Annual individual investor losses | $NT 187 billion ($US 6.4 billion) | Average per year, Taiwan Stock Exchange 1995–1999 |
| Losses as % of Taiwan GDP | 2.2% | Five-year total 1995–1999 |
| Losses as % of total personal income | 2.8% | Five-year total 1995–1999 |
| Loss breakdown: trading losses | 27% of total | Taiwan Stock Exchange 1995–1999 |
| Loss breakdown: commissions | 32% of total | Taiwan Stock Exchange 1995–1999 |
| Loss breakdown: transaction taxes | 34% of total | Taiwan Stock Exchange 1995–1999 |
| Loss breakdown: market-timing losses | 7% of total | Taiwan Stock Exchange 1995–1999 |
| Annual institutional gain (after transaction costs) | 1.5 percentage points | Aggregate institutional portfolio, Taiwan Stock Exchange 1995–1999 |
| Foreign institutions' share of institutional profits | 46.2% | Trading and market-timing gross profits, six-month horizon |
| Mean daily individual losses (140-day horizon) | $NT 178.7 million | t = −4.68; Taiwan Stock Exchange 1995–1999 |
| Share of trades from aggressive orders | 64% | All trades, Taiwan Stock Exchange 1995–1999 |
| TSE annual turnover | approximately 300% | Average 1995–1999 |
| Day trading as % of total trading volume | 23% | By dollar value, Taiwan Stock Exchange 1995–1999 |
| Four-factor model | Rt − Rft = α + β(Rmt − Rft) + s·SMBt + h·HMLt + w·WMLt | Monthly abnormal return estimation for each investor group (Equation 1) |
| Cumulative Abnormal Return | CART = Σ(MAbuy_τ − MAsell_τ) | Event-time return on stocks bought less stocks sold (Equation 2) |

## Why This Matters

Countries relying on personal investment accounts for retirement savings expose citizens to the costs of uninformed active trading. Taiwan equity mutual funds earned positive net returns despite annual expense ratios of 2.4% to 3.1%. Fewer than 1% of household equity was held in funds during the sample period, suggesting most investors did not take the lower-cost alternative. The lottery experiment implies that some retail trading serves a gambling motive, complicating purely educational responses to overtrading. Trading costs and market impact are invisible until they accumulate across an account. A [paper trading simulator](/tools/paper-trading-simulator/) that carries one balance across a session makes the erosion visible in the equity curve.

## FAQ

### How large are the annual trading losses for individual investors on the Taiwan Stock Exchange?

3.8 percentage points per year was the annual return penalty for individual investors from 1995 to 1999. Total losses reached $NT 935 billion ($US 32 billion) over five years. The breakdown: 27% trading losses, 32% commissions, 34% transaction taxes, and 7% market-timing losses.

### Do aggressive or passive orders drive individual investor losses?

$NT 178.7 million was the mean daily loss at a 140-day horizon, and virtually all of it traced to aggressive orders. Passive individual trades earned short-run profits that eroded to zero by 25 to 140 trading days. Institutions earned reliably positive profits from both passive and aggressive trades at all horizons.

### How do foreign institutional investors perform relative to domestic traders?

46.2% of all institutional trading and market-timing gross profits went to foreign investors at a six-month horizon. At shorter horizons, foreigners earned roughly one-fourth of institutional profits. Net of transaction costs, foreign investors averaged $NT 75.5 million in daily profits. Dealers averaged $NT 5.0 million and mutual funds $NT 48.4 million.

### Did the introduction of legalized gambling change trading activity in Taiwan?

One-fourth is the estimated reduction in TSE monthly turnover after legalized gambling was introduced (β5 = −5.62, t = −3.69). Monthly TSE turnover averaged 22.6% before the lottery introduction. Annual net lottery losses averaged about $NT 32.9 billion, versus the estimated $NT 46.75 billion annual reduction in trading losses from lower activity.

## Source

Barber, B. M., Lee, Y.-T., Liu, Y.-J., and Odean, T. (2009). Just How Much Do Individual Investors Lose by Trading? *Review of Financial Studies*, 22(2), 609–632.

[Read the full paper →](https://faculty.haas.berkeley.edu/odean/papers%20current%20versions/justhowmuchdoindividualinvestorslose_rfs_2009.pdf)