- 1. Household Finance andPrivate Retirement Provision:A
Marketing Finance perspective Piet Eichholtz Maastricht
University
2. Marketing-Finance in MaastrichtThe Finance perspective
- Start in 2007, anchored on Joost Pennings
- Unique International MSc program: Marketing-Finance
Interface
- Very close link to financial industry
- Good fit with earlier research lines in Finance Department
- Very good fit with existing research in private retirement
provision
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- Individual investor behavior and attitudes
3. Alex platform provides unique perspective on private
investment decisions
- Option Trading and Individual Investor Performance
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- Rob Bauer, Mathijs Cosemans, Piet Eichholtz (2008)
- Paper uses trading data set
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- Individual accounts between 2000-1 and 2006-3
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- 41,880 equity traders and 26,666 option traders
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- 8 million trades, almost half in equities
- Measure impact of trading on investor performance
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- Do investors understand risk/return?
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- Do investors have behavioral biases influencing
performance?
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- Do they diversify adequately?
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- How and why do they use derivatives?
4. Related literature regarding private investor behavior and
performance
- Puzzling finding of prior research is excessive trading by
private investors
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- Barber and Odean (2000): gains from trading insufficient to
cover costs
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- Odean (1998): investors trade too much due to
overconfidence
- Investor irrationality in option markets
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- Poteshman and Serbin (2003): early exercise of options
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- Lakonishok et al. (2007): large fraction of option activity
motivated by speculation
- Strong evidence of performance persistence
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- Coval et al. (2005): small group of investors consistently
beats markets
5. Average Investor Performance Raw monthly returns and
alphas
- Performance attribution using extension of Carhart (1997)
four-factor model
- Option-based factors added to capture nonlineair payoffs
- IT factor added to capture tech-related style tilts
6. Investor sentiment and market timing Investors keep
speculating on further market fall after recovery 7. Motivations
for trading options (1) Type of position: put/call, own/write,
covered/naked 8. Motivations for trading options (2) Selected
results from online client survey
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- 2,323 option traders; 2,193 equity traders
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- overconfidence for option traders
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- speculation and entertainment more important for option
traders
9. Performance Persistence (1)
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- Coval et al. (2005): persistent winners outperform losers by 8%
per year, unexplained by size, value, momentum
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- Brown and Goetzmann (1995), Carhart (1997): mixed evidence of
performance persistence by mutual funds
- Why would individuals be able to beat the market?
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- Price impact of trades is smaller
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- Fewer asset allocation constraints
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- Sort investors into decile portfolios based on return during
formation period, calculate decile returns in evaluation
period
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- T-test on performance difference between deciles 1 and 10
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- Spearman rank correlation formation and evaluation periods
10. Performance Persistence (2) Against hypothetical index fund
and mutual fund 11. Performance Persistence (3) Decile performances
and rank ordering 12. Performance Persistence (4) Investor
characteristics 13. Conclusions
- Individual investors incur large losses on option and equity
investments
- Poor performance explained by bad market timing due to
overreaction to past market movements
- Trading costs and lack of knowledge contribute to losses
- Gambling and entertainment seems motivation for trading
- Bad performers stay bad; good performers stay good
- Trading hurts investor performance and trading options hurts
most
14. Implications for private retirement provision
- Left to their own devices, only a minority of citizens seem to
be able to invest adequately for retirement
- Some form of paternalism seems in place
- The active mutual fund market does not provide a good
answer
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- Bloated costs, too much trading, weak performance
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- David Swensen (2005): Overwhelmingly, mutual funds extract
enormous sums frominvestors in exchange for providing a shocking
disservice.
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- Mutual funds face a fundamental conflict of interest
- The collective pension system has a better cost basis
- but does it provide enough flexibility and choice?
15. Two ways out I. Steering people towards passive
strategies
- Overwhelming academic evidence points to passive low-fee
strategies
- How do we get people into long term passive index funds?
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- The Swedish model (using a default fund) is a way out, but
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- does it steer people hard enough?
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- Many Swedes still chose top historical performer (high risk
tech fund)
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- Only 4.1% of chosen funds were indexed
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- is the default choice the best choice for all?
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- What strategic mix of passive funds is optimal?
16. Two ways out II. Life cycle and complementary portfolios
- Optimal portfolio changes with peoples life cycle and human
capital
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- Ability to make up for losses on the way
- Optimal portfolio depends on non-financial portfolio
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- Position in housing market
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- Position in mortgage market
- Design life cycle portfolios
- Design complementary portfolios
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- Portfolio based on ALM at the client level
- Adjust defaults accordingly and dynamically