Sunday, February 10, 2008

Consumer Heterogeneity and Consistent Market Choices

Western Europe is creating some pretty wild data sets that UCLA economists have used for some creative "freaky" research. For an example from Norway take a look at this: and now we have some funky work based on data from Finland. As discussed below, the authors were able to merge at the individual level ; data on who has received speeding tickets with data on asset portfolio allocations. All else equal, guys who get more speeding tickets trade and adjust their portfolios more than other people. The inference about the people is that "thrill seekers" drive fast and churn their portfolio's fast. This is ADD in action. This "consistency" across very different markets and behaviors is interesting.

In a very different setting, I have documented evidence of the same "consistency". In my paper

I document that in environmentalist communities ; people vote "green" and live a green day to day life and purchase green products. While people differ with respect to whether they are a green; those who are "green" voice their preferences in a variety of different markets --- This is my "consistency" point and the finance guys who are cited below are making a similar point about consistency but they are partioning people into "thrill seekers" and everyone else.

New York Times
February 10, 2008
Warning: Fast Driving May Lead to More Trading

IF you get speeding tickets, watch out: The chances are good that you will also engage in possibly dangerous investing behavior, too. That is the implication of a new study that found that individuals who receive more speeding tickets tend to churn their portfolios.

The study, “Sensation Seeking, Overconfidence and Trading Activity,” has been accepted for publication by The Journal of Finance. The authors are Mark S. Grinblatt, a finance professor at the University of California, Los Angeles, and Matti Keloharju, a finance professor at the Helsinki School of Economics. A version is at

The professors were able to find a correlation between speeding tickets and trading frequency after receiving access to several data sets of Finnish investors. Though the professors did not have access to the investors’ identities, one of these databases contained details of speeding tickets issued between mid-1997 and the end of 2001 to residents of Helsinki and surrounding areas. Another had information on the portfolios and trading records of all Finnish households from 1995 through 2002. The Finnish government also provided data on the incomes, age, marital status, gender, occupation and homeownership status of all those filing tax returns in 1998 and 1999.

These rich data sets enabled the professors to eliminate from consideration other possible causes of trading activity and focus on the distinct influence of speeding tickets. They found that, other things being equal, an investor’s portfolio turnover rate rose 11 percent after each additional speeding ticket he received. That is a surprisingly strong correlation, and is highly significant from a statistical point of view, according to the professors.

In an interview, Professor Grinblatt acknowledged that the propensity to speed did not remain constant throughout life. As people grow older, they are likely to become more conservative drivers — and, not coincidentally, to trade less often. But he stressed that he and his co-researcher controlled for factors like age when conducting their tests. So one way to interpret their findings is that, between two people of the same age, the one who gets a speeding ticket is likely to have 11 percent more turnover in his portfolio.

Why would the tendency to speed be associated with more trading? One possible factor that the professors explored was overconfidence: If a driver deludes himself into thinking that he can avoid being caught when speeding, he may also delude himself into believing he has above-average stock-picking ability.

After studying overconfidence, however, the professors concluded that it was not the source of the link. They had also been granted access to the extensive psychological tests that the Finnish armed forces administered to all men upon their induction into mandatory military service, and overconfidence was one trait these tests carefully measured. The professors found that while overconfident investors tended to trade more, the trait was not correlated with their number of speeding tickets.

(The Finnish authorities devised a way of providing the results of these tests, along with the other sets of data, without divulging anyone’s identity, thereby respecting Finland’s strict privacy laws.)

The professors’ findings about overconfidence, along with results of other complex tests they conducted, led them to conclude that the correlation between speeding tickets and more frequent trading was caused by something quite different: thrill-seeking. They found that thrill seekers — those who look for a new and risky experience just for the fun of it — trade more often not because they have an inflated belief that they can beat the market, but because they find a static portfolio too boring.

DID the thrill seekers nevertheless improve their returns by trading often? No, the professors found. They found that the stocks bought by the thrill seekers fared no better, on average, than those they sold.

If anything, Professor Grinblatt said, the thrill seekers were worse off, after considering transaction costs. They “cannot justify their trading in terms of their performance,” he concluded.

The study provides yet more evidence that psychological motivations play a large role in investment decisions. The implication is that, before we initiate any trade, it’s wise to engage in some honest self-reflection about our motivations. Are we trading because there is compelling evidence supporting it, or simply because we find our long-held stocks aren’t exciting enough?

Undoubtedly, all of us would benefit from periodically asking ourselves this question, but Professor Grinblatt said that it was especially important to ask it after we’ve been pulled over for speeding.

Mark Hulbert is editor of The Hulbert Financial Digest, a service of MarketWatch. E-mail: