# How Individual Investors Trade: Overtrading and Underperformance

Cite as: Gorak, R. (2026). How Individual Investors Trade: Overtrading and Underperformance. Tradicted. https://www.tradicted.com/research/barber-individual-2011/
Paper: Brad M. Barber and Terrance Odean — *The Behavior of Individual Investors*
Published in: Handbook of the Economics of Finance (2013)
Original: https://faculty.haas.berkeley.edu/odean/papers%20current%20versions/behavior%20of%20individual%20investors.pdf

Key finding: The most active 20% of individual investors earned 11.4% annually net of costs versus 18.5% for the least active 20%—a 7 percentage-point gap—in 78,000 US brokerage accounts over 1991–1996.

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Individual investor behavior describes the systematic patterns—overtrading, the disposition effect, and under-diversification—that distinguish retail trading from rational-agent models. In The Behavior of Individual Investors, Barber and Odean (2011) analyzed 78,000 US brokerage accounts from 1991 to 1996. The most active 20% of investors earned 11.4% annually net of costs versus 18.5% for the least active 20%—a 7 percentage-point gap. The average investor's portfolio earned a Fama–French three-factor alpha of −31.1 bps per month after costs.

## What the Study Found

The most active quintile averaged annual turnover of 258% and earned a monthly three-factor alpha of −86.4 bps after costs. Individual investors realize gains at about a 50% higher rate than losses—the disposition effect. In Taiwan, aggregate individual investor trading losses equaled 2.8% of personal income and 2.2% of GDP annually. Men's annual turnover is about 80% versus 50% for women, accounting for virtually all of the gender performance gap. The average investor in the LDB dataset held only 4 stocks, creating high exposure to idiosyncratic risk.

## Methodology

The primary dataset is the Large Discount Brokerage (LDB) dataset, individual brokerage accounts from a large US discount broker. The sample covers 78,000 investors over 1991–1996. Performance is measured using calendar-time portfolios and the Fama–French three-factor model. The disposition effect is estimated with Cox proportional hazard rate models, using return-since-purchase categories as time-varying covariates.

## Key Statistics

| Metric | Finding | Context |
|---|---|---|
| Annual net return, most active quintile | 11.4% | Top 20% by turnover, LDB 1991–1996 |
| Annual net return, least active quintile | 18.5% | Bottom 20% by turnover, LDB 1991–1996 |
| Three-factor alpha, average investor (after costs) | −31.1 bps/month | LDB 1991–1996 |
| Three-factor alpha, most active quintile (after costs) | −86.4 bps/month | Annual turnover 258%, LDB 1991–1996 |
| Annual turnover, most active quintile | 258% | LDB dataset 1991–1996 |
| Gain realization rate vs. loss realization rate | ~50% higher for gains | Odean (1998), 10,000 accounts 1987–1993 |
| Hazard ratio: selling stock up 18–22% vs. near-zero return | 2.65× | LDB dataset, Cox hazard model |
| Hazard ratio: selling stock up 18–22% vs. down 18–22% | 1.77× | LDB dataset, Cox hazard model |
| Taiwan investor underperformance vs. market | −3.8 pps/year | Barber et al. (2009), Taiwan 1995–1999 |
| Taiwan trading losses as % of personal income | 2.8% | Barber et al. (2009), Taiwan 1995–1999 |
| Men's vs. women's annual turnover | ~80% vs. ~50% | LDB 1991–1996 |
| Average stocks held per investor | 4 stocks | LDB dataset |
| Cox proportional hazard model | h(t, x(t)) = h₀(t) exp(β₁x₁ + ⋯ + βₚxₚ) | Baseline hazard scaled by exponential of covariates |

## Why This Matters

The evidence consistently shows that trading activity is the primary driver of retail investor underperformance, not bad stock selection alone. The disposition effect compounds the damage by generating unnecessary tax liabilities and causing investors to exit profitable positions too early. Under-diversification further exposes retail portfolios to idiosyncratic risk that could easily be eliminated. Investors who adopt a passive, buy-and-hold approach in low-cost diversified funds avoid all three sources of value destruction. The biases in this survey are measurable in one account given enough logged trades. A [trading journal](/trading-journal/) provides the sample.

## FAQ

### How much does trading frequency hurt individual investor returns?

The most active 20% earned 11.4% annually net of costs versus 18.5% for the least active 20%—a 7 percentage-point gap. The active group averaged 258% annual portfolio turnover. Their Fama–French three-factor alpha was −86.4 basis points per month after costs, or roughly −10.4 percentage points annually.

### What is the disposition effect and how large is it?

Individual investors realize gains at about a 50% higher rate than losses. In the LDB dataset, the hazard rate for selling a stock up 18–22% since purchase is 2.65 times greater than for a near-zero-return stock. It is 1.77 times greater than for a stock down 18–22% since purchase.

### Do men and women invest differently?

Men's annual turnover is about 80% versus 50% for women in the LDB dataset. Both sexes achieve similar gross returns on the stocks they select, so men's higher transaction costs explain virtually the entire performance gap between genders.

### How large are individual investor losses at the aggregate level?

Individual investors in Taiwan lost 3.8 percentage points of annual return relative to the market. Their aggregate trading losses equaled 2.8% of Taiwan's total personal income and 2.2% of GDP. Roughly equal shares came from perverse stock selection, commissions, and the transaction tax.

## Source

Barber, B. M., & Odean, T. (2011). The Behavior of Individual Investors. SSRN Working Paper.

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