Abstract
This article examines whether professional traders recognize transaction costs when making trade decisions. In both single and multi-period settings, professional traders are far more reluctant to realize a gross loss than an actual loss (net of transaction costs). The tendency to ignore transaction costs may lead to higher levels of overconfidence (or trading activity) because traders are more susceptible to misinterpreting negative performance outcomes than positive ones. Traders who experience higher and more frequent gross trading profits trade more actively, but they also end up losing the most money on a net basis.
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