Abstract

Previous studies refer to individual investors as dumb noise traders. We question this undifferentiated verdict by conducting an analysis of the cognitive competence of individual investors as assessed by experts. We let experts (researchers as well as experienced practitioners) assess the mathematical and verbal reasoning demands of investment tasks investigated in previous studies. Based on this assessment, we conclude that individual investors are able to perform a number of complex cognitive actions, especially those demanding higher order verbal reasoning. However, they seem to have cognitive limitations with tasks demanding greater mathematical reasoning ability. This is especially unfortunate as tasks requiring higher mathematical reasoning are considered to be more relevant to performance. These findings have important implications for future regulatory measures.

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