The individual investor: behavioral bias and portfolio management.

Summary Over the past half-century, financial theory has been built on the assumption that investors are perfectly rational. However, in recent years, research in behavioral finance has tended to show that investor behavior is not always consistent with this hypothesis. Numerous "biases" or "errors" of behavior have been highlighted by researchers. This thesis sheds original light on two "biases" or "errors" of behavior to which investors are subject: the disposition effect and overconfidence. The disposition effect is the tendency of investors to sell winning stocks more easily than losing stocks. A direct consequence of overconfidence is excessive trading in the markets. Our analysis is based on a database provided by the French online broker Cortal Consors. We track 9,619,898 positions taken by 92,603 individual investors in the French market over an eight-year period between 1999 and 2006. The results show that the investors studied are indeed subject to disposition bias and overconfidence.