Discussion Paper Details

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Title: Information Acquisition and Portfolio Performance

Author(s): Luigi Guiso and Tullio Jappelli

Publication Date: October 2006

Keyword(s): behavioural finance, overconfidence, portfolio choice and rationality

Programme Area(s): Financial Economics

Abstract: Rational investors perceive correctly the value of financial information. Investment in information is therefore rewarded with a higher Sharpe ratio. Overconfident investors overstate the quality of their own information, and thus attain a lower Sharpe ratio. We contrast the implications of the two models using a unique survey of customers of an Italian leading bank with portfolio data and measures of financial information. We find that the portfolio Sharpe ratio is negatively associated with investment in information. The negative correlation is stronger for men than women and for those who claim they know stocks well, arguably because these investors are more likely to be overconfident. We also show that investment in information is associated with more frequent trading, less delegation of portfolio decisions and less diversified portfolios. In each case, the effect of information is stronger for investors who, a priori, are suspected to be more overconfident.

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Bibliographic Reference

Guiso, L and Jappelli, T. 2006. 'Information Acquisition and Portfolio Performance'. London, Centre for Economic Policy Research.