Evidence that investors who trade more often earn lower net returns is most directly related to

Question

BlackTom AI · Accepted Answer

Overconfidence leads investors to trade excessively, which increases transaction costs and taxes and thereby reduces net returns.

Relevant knowledge points and concepts:
- Behavioral finance: overconfidence is a cognitive bias where investors overestimate their information or skill and trade more.
- Trading frequency increases explicit (commissions, bid-ask spreads) and implicit (market impact, timing costs) costs and often triggers higher tax liabilities.
- Empirical evidence (e.g., Barber and Odean) shows a negative relationship between turnover and net returns: frequent traders earn lower net returns than less-active investors.

Step-by-step reasoning:
1. Overconfident investors believe they can pick winners, so they trade more frequently than warranted.
2. Each trade incurs costs: commissions, bid-ask spreads, and price impact. Frequent trading multiplies these costs.
3. Taxes on realized gains further reduce after-tax returns when trading is frequent.
4. Even if gross returns (before costs) are similar across investors, the higher trading costs mean net returns for frequent traders are lower.
5. Empirical studies directly link higher trading activity to lower net returns, supporting the causal chain from overconfidence → excessive trading → lower net returns.

Illustrative calculation (simple example):
- Suppose two investors both achieve a gross return of 10%. Investor A trades rarely and incurs 0.5% annual trading/tax cost; net = 10% − 0.5% = 9.5%. Investor B, overconfident, trades heavily and incurs 2% annual costs; net = 10% − 2% = 8%. The difference in net returns (1.5 percentage points) arises from trading behavior driven by overconfidence.

Why the correct answer is correct:
- The direct behavioral explanation for excessive trading and lower net returns is overconfidence. The empirical evidence mentioned in the question most directly ties to this bias.

Why the other options are incorrect:
- The risk-free rate describes a benchmark return but does not explain trading frequency or its link to lower net returns.
- The market portfolio having β = 1 is a CAPM property unrelated to individual trading behavior and costs.
- The dividend discount model explains intrinsic value in terms of dividends and required return, not why frequent trading reduces net returns.

Conclusion: The best answer is overconfidence, which matches the provided correct answer.

Evidence that investors who trade more often earn lower net returns is most directly related to单项选择题

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