Hard-to-Value Stocks, Behavioral Biases, and Informed Trading

2009/10/08 by Alok Kumar · 342 citations
Business, Management and Accounting · Decision Sciences · Economics, Econometrics and Finance · #Actuarial science #Auditing, Earnings Management, Governance #Behavioral economics #Computer science #Decision-Making and Behavioral Economics #Econometrics #Economics #Exploit #Finance #Financial Markets and Investment Strategies #Financial economics #Microeconomics #Stock (firearms) #Valuation (finance) #Value (mathematics)

paper · doi:10.1017/s0022109009990342

published in Journal of Financial and Quantitative Analysis 44(6), 1375-1401 (Cambridge University Press)

openalex publication_date 2009/10/08 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/25

Abstract

Abstract This paper uses investor-level data to provide direct evidence for an intuitive but surprisingly untested proposition that investors make larger investment mistakes when valuation uncertainty is higher and stocks are more difficult to value. Using multiple measures of valuation uncertainty and multiple behavioral bias proxies, I show that individual investors exhibit stronger behavioral biases when stocks are harder to value and when market-level uncertainty is higher. I also find that informed trading intensity is higher among stocks where individual investors exhibit stronger behavioral biases. Collectively, these results indicate that uncertainty at both stock and market levels amplifies individual investors’ behavioral biases and that relatively better informed investors attempt to exploit those biases.

Citations

• Economic Forces and the Stock Market
• Risk, Return, and Equilibrium: Empirical Tests
• Investor Psychology and Security Market Under‐ and Overreactions
• Prospect Theory: An Analysis of Decision under Risk
• Do Investors Trade Too Much?
• Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors
• Rational Choice and the Framing of Decisions

Cited by

• How does political relationship building affect market efficiency? Evidence from China's anti-corruption campaign
• Do Short Exposure and Systematic Risk Exposure Drive Asymmetries in the Disposition Effect?
• High volatility eliminates the disposition effect in a market crisis
• Dynamic Asset Pricing: Integrating FinBERT-Based Sentiment Quantification with the Fama--French Five-Factor Model
• Does Property Return Affect Seller Behavior? An Empirical Study of China's Real Estate Market. [europepmc]
• Behaviorally informed deep reinforcement learning for portfolio optimization with loss aversion and overconfidence. [europepmc]

Related

• Investor Psychology and Security Market Under‐ and Overreactions
• Do investors exhibit behavioral biases in investment decision making? A systematic review
• Trading performance, disposition effect, overconfidence, representativeness bias, and experience of emerging market investors
• Investor Sentiment in the Stock Market
• Investigating the Role of Investor Behavior Bias on Traders' Financial Performance with a Focus on the Role of Financial Literacy