Macquarie University
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Retail investor behavioural biases, the causes and impacts: evidence from equity markets

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posted on 2022-03-28, 23:44 authored by Grace Lepone
This dissertation examines the trading behaviour of retail investors. The research provides empirical evidence on an increasingly important issue, the behaviour of retail investors, possible causes for their sub-optimal behaviour, and the impact of their biases. Given the high proportion of trades executed by retail investors in equity markets and their impact on price movements, the behaviour of retail investors is of interest to themselves, academics, financial institutions, market operators and regulators. Each chapter in this dissertation addresses a research question with limited or conflicting prior research findings to provide evidence and insights to help researchers, businesses, investors and regulators understand investors' behavioural biases. The first issue examined is a bias displayed in investors' selling behaviour. Existing research finds that investors are more willing to sell for a gain than to sell at a loss, representing a bias known as the disposition effect. The disposition effect analysis uses investment account records from a leading retail brokerage house in Australia. The research examines the extent to which the disposition effect exists across a large set of investor characteristics, including ethnicity, in a multicultural host country market setting. Chinese investors in the sample are identified using a surname flag from a comprehensive surname list tested to be valid for predicting Chinese ethnicity in medical research, and the degree of loss aversion among this group is examined. Strong evidence of the disposition effect is found across the whole sample. The results show that investors are, on average, approximately twice as likely to realise a gain as to realise a loss, broadly supporting the findings of Odean (1998). This bias holds across all investor characteristic groups, although the level of bias differs depending on investor sophistication, gender, age and ethnicity. The second chapter examines bias in investors purchasing behaviour; the purchase of lottery stocks which symbolises risk seeking. The research first defines lottery stocks using different approaches including Kumar (2009), Bali, Cakici and Whitelaw (2011) and an improved version of Bali, Cakici and Whitelaw (2011), and confirms that lottery stocks are risky investments with inferior returns. Brokerage data set is then employed to analyse the investment in lottery stocks. Lottery stocks attract mainly retail investors. Among the sample investors, those who distribute a great portion of their portfolio on lottery stocks obtain significantly lower risk adjusted returns compared to the rest of the investors in the sample and the overall market. Investigation on triggers of the tendency to gamble in the stock market reveals that investors are more prone to risk seeking behaviour following previous portfolio gains, supporting the behavioural theory of the house money effect. This finding is robust across all investors, including those who are considered non-gambling-preferred investors based on their overall low lottery stock holding weight. Consistent with previous findings, certain investor groups are found to be more likely to invest in lottery stocks. Specifically, women are less likely to gamble with lottery stocks, and the increase of age reduces the tendency to gamble. Having examined Australian investors using samples over a relatively short time period, the third chapter uses an overseas market sample over two decades to test the same biases. There are two motivations for this; (i) to test that biases observed in previous studies are not unique to Australian investors, and (ii) to test that the observed biases exist over a longer horizon, i.e., they are not driven by specific sample periods. It is found that a person's lifetime experience, as reflected by the time he/she is born, influences their behaviour. In addition, overall economic and stock market conditions at the time when an investor forms decisions, such as the unemployment rate and the number of corporate bankruptcies, affect the likelihood of behavioural biases. Evidence of interactions between different behavioural biases is also found; specifically, investors who are more risk seeking are at the same time more likely to be affected by the disposition effect. The final chapter examines the trading of stocks by listed companies' directors and the announcements of their trading. Company directors, when they invest in the stock market, are trading individuals. As such, they are expected to behave similarly to other investors. However, when they trade stocks of their own companies, they are insiders with privileged (superior) information. By analysing the trading of 'the informed', we are able to test whether having superior information subdues behavioural biases. Both director purchases and sales of companies listed on the ASX are examined, and results indicate that directors do use their superior information to time their trades, making these trades free from behavioural bias. There is also evidence that other traders in the market watch director trading and collect their trading information. However, retail investors cannot make superior returns by piggybacking directors' trades, after considering transaction costs and the speed of response of other more sophisticated investors. Given this, the following of directors' trades can be considered a form of biased behaviour, namely herding.


Table of Contents

Chapter 1. Introduction -- Chapter 2. Literature review -- Chapter 3. Disposition effect -- Chapter 4. Are paper winners gamblers? Evidence from Australian retail investors -- Chapter 5. Disposition effect and stock market gambling over two decades - evidence from the Finland stock market -- Chapter 6. The price impact of director trading and announcements - evidence from the Australian Securities Exchange -- Chapter 7. Conclusions -- References.


Bibliography: pages 197-212 Empirical thesis.

Awarding Institution

Macquarie University

Degree Type

Thesis PhD


PhD, Macquarie University, Macquarie Graduate School of Management

Department, Centre or School

Macquarie Graduate School of Management

Year of Award


Principal Supervisor

Vito Mollica


Copyright Grace Lepone 2016. Copyright disclaimer:




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