are most influenced by attention, the stocks they buy will subsequently underperform
those they sell. We find strong empirical support for this prediction. Not only does
attention-based buying not benefit investors, but it appears to also influence subsequent
stock returns.
The transactional data we analyze are well suited for documenting what investors do,
but not as well suited for determining why they do it. We began with a theory which
leads to several new testable predictions about how investors behave. Our empirical
analysis confirms these predictions and, in so doing, documents previously un-
documented patterns in investor behavior. In Section 7.5, we test one plausible alter-
native hypothesis to ours. Undoubtedly, readers will look for other alternative
explanations for why investors do the things we show they do. To compete with our
theory, an alternative theory should predict our results for abnormal volume, extreme
returns, news, non-binding short-sale constraints, and returns, while offering new
predictions of its own.
Previous work has shown that most investors do not benefit from active trading. On
average, the stocks they buy subsequently underperform those they sell (Odean, 1999),
and the most active traders underperform those who trade less (Barber and Odean,
2000). The attention-driven buying patterns we document here do not generate superior
returns. We believe that most investors will benefit from a strategy of buying and
holding a well-diversified portfolio. Investors who insist on hunting for the next brilliant
stock would be well advised to remember what California prospectors discovered ages
ago: All that glitters is not gold.
7.8 Acknowledgments
We appreciate the comments of Jonathan Berk, David Blake, Ken French, Simon
Gervais, John Griffin, Andrew Karolyi, Sendhil Mullainathan, Mark Rubinstein, and
Brett Trueman. We also appreciate the comments of seminar participants at Arizona
State University; the Behavioral Decision Research in Management Conference; the
University of California, Berkeley; the University of California, Irvine; the Copenhagen
Business School; Cornell University; Emory; HEC; Norwegian School of Economics
and Business Administration; Ohio State University; Osaka University; the Q Group;
the Stanford Institute for Theoretical Economics; the Stockholm School of Economics;
the University of Tilburg; Vanderbilt; the Wharton School; the CEPR/JFI Symposium
at INSEAD; Mellon Capital Management; the National Bureau of Economic Research;
the Risk Perceptions and Capital Markets Conference at Northwestern University; and
the European Finance Association Meeting. We are grateful to the Plexus Group, to
BARRA, to Barclays Global Investors (for the Best Conference Paper Award at the
2005 European Finance Association Meeting), to the retail broker and discount brokers
who provided us with the data for this study, and to the Institute for Quantitative
Research and the National Science Foundation (grants SES-0111470 and SES-
0222107) for financial support. Shane Shepherd, Michael Foster, and Michael Bowers
provided valuable research assistance.
208 News and abnormal returns