Portfolio management by individual investors : a behavioral approach.

Summary This thesis is composed of four chapters that contribute to a better understanding of individual investors' trading behavior and performance. In the first chapter, we conduct the first study devoted to the portfolio performance of French individual investors. Using a database of more than 8 million transactions by 56,723 investors, we show that French investors have negative risk-adjusted returns on their portfolios and make penalizing investment choices. In the second chapter, we show that individual aspiration is a key determinant to explain portfolio performance heterogeneity. We define aspiration according to the Behavioral Portfolio Theory. Investors with high aspirations hold riskier portfolios, trade more frequently and diversify less than investors with low aspirations. Controlling for trading frequency, diversification, and usual risk factors, we show that high aspirational investors underperform low aspirational investors.In the third chapter we analyze the performance of individual investors via measures tailored to their preferences. When their performance is evaluated with these measures rather than with the Sharpe ratio, a larger share of investors beat the market index. This observation sheds new light on the management capabilities of individual investors. However, we show that the performance improvement is related to portfolio skewness rather than to relevant stock selection.In the final chapter, we explore the redemption behavior of individual investors. We show that investors prefer to repurchase (1) stocks for which they have realized a capital gain at the time of sale (2) stocks whose price has decreased since the sale. Our tests rule out rational explanations and confirm that regret avoidance is at the root of such behavior. Based on a survival analysis, we show that sophisticated investors are less prone to these preferences.