Overtrading occurs when investors trade more than is justified by their information, paying unnecessary transaction costs in pursuit of gains they never realize. An investor switching stocks must earn roughly 6 percent more on the new position just to break even after commissions and spreads. In Do Investors Trade Too Much?, Odean (1999) analyzed 97,483 trades across 10,000 U.S. discount brokerage accounts from January 1987 through December 1993. Purchased securities underperformed sold securities by 3.31 percent over the following year—even before counting transaction costs.
What the Study Found
When trading was filtered to exclude liquidity demands, tax-loss selling, and rebalancing, the return gap widened to 5.82 percent over one year. The bottom 90 percent of investors by trading activity showed a 4.28 percent return gap over one year. The most active 10 percent of investors showed a narrower gap of 2.69 percent over one year. Market-adjusted returns confirmed poor stock selection: purchases trailed sales by 3.22 percent over 252 trading days. A calendar-time portfolio using the Fama-French three-factor model produced a buy-minus-sell alpha of −0.249 percent per month, significant at the 1 percent level.
Methodology
The data came from an anonymous U.S. discount brokerage that provided trade and position records for 10,000 randomly selected accounts. The 162,948 trade records span January 1987 through December 1993, with 97,483 trades matched to CRSP daily return data. Statistical significance was estimated by bootstrapping a 1,000-observation empirical distribution, with replacement securities matched by CRSP size decile and book-to-market quintile. Robustness checks used calendar-time portfolios with CAPM and Fama-French three-factor regressions across 4-, 12-, and 24-month formation periods.
Key Statistics
| Metric | Finding | Context |
|---|---|---|
| Return gap: purchases vs. sales (84 trading days) | −1.36% | All transactions, full sample |
| Return gap: purchases vs. sales (252 trading days) | −3.31% | All transactions, January 1987–December 1993 |
| Return gap: purchases vs. sales (504 trading days) | −3.32% | All transactions, full sample |
| Return gap, excluding liquidity/tax/rebalancing (252 days) | −5.82% | Purchases within 3 weeks of profitable complete-position sales |
| Return gap: bottom 90% of traders (252 days) | −4.28% | Least active investors by trade count |
| Return gap: top 10% of traders (252 days) | −2.69% | Most active investors by trade count |
| Market-adjusted return gap (252 days) | −3.22% | Excess of CRSP value-weighted index; all transactions |
| Fama-French alpha, buy-minus-sell portfolio | −0.249%/month | 4-month formation period; significant at 1% |
| CAPM alpha (Jensen alpha), buy-minus-sell portfolio | −0.311%/month | 4-month formation period; significant at 1% |
| Average round-trip trading cost | ~5.9% | Average purchase commission 2.23% + average sale commission 2.76%; includes bid-ask spread estimate |
| Average monthly portfolio turnover | 6.5% | Full sample; estimated from position statements |
| Market timing regression (Eq. 4): R_mt = α + β·(Buys_{t-1} / (Buys_{t-1} + Sells_{t-1})) + ε | t = −0.4, R² = 0.0 | Lagged order imbalance does not predict market return |
| Average return to purchases (Eq. 1): R_{P,T} = (Σ∏(1 + R_{j,t})) / N − 1 | Computed over T = 84, 252, or 504 days | N = number of purchases; R_{j,t} = CRSP daily return for security j |
Why This Matters
Retail investors who actively select stocks appear to misread information direction, not merely overestimate its precision. Reducing trade frequency would improve net returns for active retail investors, since each round-trip trade erodes principal before any return can accumulate. Attention-driven buying—concentrating purchases in securities that have moved dramatically—amplifies exposure to high-momentum names prone to reversal. The results challenge the assumption that retail investors hold useful private information about the securities they choose to trade.