In this paper, we disentangle investor sentiment into two components: mood and household attitudes towards the economy. We apply acoustical analysis to the daily top ten of music downloads in iTunes for Germany to derive a novel and direct measure for mood. We match this novel mood index with trading data of German individual investors. We find that when mood is positive, investors purchase more, particularly trading into risky and out of less-risky securities. To proxy for household attitudes towards the economy, we use an already existing index (FEARS), which bases on Google search volumes of negative economic terms. We find that FEARS drives trading in the same fashion as in previous studies and that these effects significantly depend on mood. We conclude that there are two sources of sentiment driving individual investors, which significantly interact.
Learning from mistakes (with M. Koestner, B. Loos and A. Hackethal)
Citation: Journal of Business Economics, 2017, Volume 87, pp. 669–703 (Download paper)
Based on recent empirical evidence which suggests that as investors gain experience, their investment performance improves, we hypothesize that the specific mechanism through which experience translates into better investment returns is closely related to learning from investment mistakes. To test our hypotheses, we use an administrative dataset which covers the trading history of 19,487 individual investors. Our results show that underdiversification and the disposition effect do not decline as investors gain experience. However, we find that experience correlates with less portfolio turnover. We conclude that compared to other investment mistakes, it is relatively easy for individuals to identify and avoid costs related to excessive trading activity. When correlating experience with portfolio returns, we find that as investors gain experience, their portfolio returns improve. A comparison of returns before and after accounting for transaction costs reveals that this effect is related to learning from overtrading.
Abusing ETFs (with U. Bhattacharya, A. Hackethal, and B. Loos)
Citation: Review of Finance, 2017, Volume 21, pp. 1217-1250 (Download paper)
Using data from a large German brokerage, we find that individuals investing in passive exchange-traded funds (ETFs) do not improve their portfolio performance, even before transaction costs. Further analysis suggests that this is because of poor ETF timing as well as poor ETF selection (relative to the choice of low-cost, well-diversified ETFs). An exploration of investor heterogeneity shows that though investors who trade more have worse ETF timing, no groups of investors benefit by using ETFs, and no groups will lose by investing in low-cost, well-diversified ETFs.
The impact of weather on German retail investors (with J. Schmittmann, J. Pirschel and A. Hackethal)
Citation: Review of Finance, 2015, Vol. 19, pp. 1143-1183 (Download paper)
We explore the impact of weather on trading by individual investors. Over a time span of 94 months, we analyze daily trading records of individual investors. Controlling for various investor- and market-specific factors, we find a two-fold effect of weather. We first observe that investor sentiment, as measured by purchases relative to sales, is significantly higher on days with good weather. In addition, we find that retail investors generally trade more on bad weather days. This result is consistent with the notion that retail investors incur an opportunity cost for spending time trading on days with good weather.
The effect of personal portfolio reporting on private investors (with R. Gerhardt)
Citation: Financial Markets and Portfolio Management, 2013, Volume 27, pp. 257-273. (awarded the best paper of the year award)
Information search is costly for private households, especially in relation to their wealth. This paper investigates how retail customers react to free portfolio reporting—and thus reduced search costs—in a unique experimental setting. A large German direct bank sends portfolio reports to 10,000 customers while maintaining a control group of equal size and structure that receives no reports. Analyzing demographics as well as detailed portfolio and trade data, we find that gender, wealth, trade frequency, risk tolerance, and diversification drive the interest in portfolio information. Reading a portfolio report also triggers trading actions; thus, investors seem to appreciate the reduced information costs and act on the information. In addition to contributing to the financial literature on households’ information acquisition, this study derives valuable implications for financial institutions regarding communications and services for their customers.
Is unbiased financial advice to retail investors sufficient? Answers from a large field study (with U. Bhattacharya, A. Hackethal, S. Kaesler and B. Loos)
Citation: Review of Financial Studies, 2012, Vol. 25, pp. 975-1032 (Download paper)
Working with one of the largest brokerages in Germany, we record what happens when unbiased investment advice is offered to a random set of approximately 8,000 active retail customers out of the brokerage's several hundred thousand retail customers. We find that investors who most need the financial advice are least likely to obtain it. The investors who do obtain the advice (about 5%), however, hardly follow the advice and do not improve their portfolio efficiency by much. Overall, our results imply that the mere availability of unbiased financial advice is a necessary but not sufficient condition for benefiting retail investors.
Verbraucherschutz durch Leistungstransparenz in der Anlageberatung (with A. Hackethal and K. Langenbucher)
Citation: Zeitschrift für betriebswirtschaftliche Forschung (zfbf), 2010, Vol. 62, pp. 108-121 (Download paper)
Überprüfung des Zusammenhangs zwischen Weiterempfehlungsbereitschaft und Kundenwert (with P. Schmitt and B. Skiera)
Citation: Schmalenbachs Zeitschrift für betriebswirtschaftliche Forschung, 2010, Vol. 62, pp. 30-59 (Download paper)
Das in der Praxis weit verbreitete Net Promoter Score (NPS)-Konzept unterstellt, dass ein positiver, nicht-linearer Zusammenhang zwischen der Weiterempfehlungsbereitschaft eines Kunden und dessen Kundenwert besteht. Allerdings wurde diese für das Kundenmanagement zentrale Behauptung noch nicht empirisch überprüft. Die vorliegende Arbeit untersucht daher - anhand eines Datensatzes aus der Finanzdienstleistungsbranche - den Zusammenhang zwischen der Weiterempfehlungsbereitschaft eines Kunden und dessen Kundenwert. Die Ergebnisse zeigen, dass Weiterempfehlungsbereitschaft im vorliegenden Datensatz keinen signifikanten Einfluss auf den Kundenwert hat. Die Weiterempfehlungsbereitschaft erhöht zwar den Deckungsbeitrag, nicht jedoch die Kundenbindung. Die Kennzahl Zufriedenheit hat dagegen einen signifikanten Einfluss auf den Kundenwert. Der erwartete nicht-lineare Zusammenhang zwischen Weiterempfehlungsbereitschaft (beziehungsweise Zufriedenheit) und Kundenwert kann nicht bestätigt werden. Aufgrund der vorliegenden Resultate kann die herausragende Bedeutung des NPS-Konzepts für das Kundenmanagement nicht bestätigt werden.