What leads to overtrading and under-diversification? Survey evidence from retail investors in an emerging market

Abstract

Using detailed survey data of 620 Vietnamese investors, we examine the characteristics and behavioral patterns that lead to overtrading and under-diversification. We also investigate factors that affect the proportion of wealth in equity investment. In particular, we study the effect of overconfidence, social transmission, time discounting, self-reported risk tolerance, the frequency at which investors evaluate their investment portfolios and other individual characteristics such as gender, age, education, and wealth. We confirm previous findings on their connections also in the new setting of an emerging market. Moreover, we find positive evidence for a social transmission bias on under-diversification and that of overconfidence on equity allocation, and for both overconfidence and evaluation frequency on overtrading. The results are of practical value and may help to reduce excessive trading and under-diversification.