Money & Computing

University of California Professors Brad M. Barber and Terrance Odean published research and findings in a  paper entitled Why Do Investors Trade Too Much? What follows are some excerpts:

Overconfidence

Psychologists observe that most people are overconfident; they overestimate the precision of their knowledge and the level of their abilities. If, for example, you ask a group of people to rate their own driving abilities, you will find that most people consider themselves to be above average drivers. Overconfidence afflicts experts — including psychologists — as well as laymen. The overconfident investor is so sure that she is right, that she is more likely to act on her beliefs. The result: she trades too much.

Active Trading: The Real Evidence

Consider an investor making a speculative trade. She isn’t selling to realize a deliberate tax loss or to raise money to pay a debt. She sells one stock and buys another because she thinks the stock she is buying will outperform the one she’s selling. To break even on this trade, the new stock doesn’t need to merely beat the old one. It needs to do so by enough to cover trading costs. Unfortunately for most individual investors, the stocks they buy subsequently underperform the stocks they sell. In our studies of investors at a large discount brokerage in the US, the average shortfall over a one-year horizon is more than two percentage points. If you add in the costs of trading — bid-ask spreads, commissions, and taxes — the shortfall more than doubles.

The more actively investors trade, the less they earn. We divided 66,465 households into five groups on the basis of the level of turnover in their common stock portfolios. The 20 percent of investors who traded most actively earned an average net annual return 7.2 percentage points lower than that of the least active investors .

Overconfidence and Gender

Men tend to be more overconfident than women. The difference emerges most strongly in areas such as finance that are perceived by our society to lie in the male domain. If overconfidence leads to excessive trading, one might then expect men to trade more than women. They do. We find that men trade 45 percent more actively than women. Single men trade 67 percent more actively than single women. Both men and women are lousy traders; men merely trade more frequently. Both men and women reduce their returns by trading, men reduce theirs by an additional 1 percentage point annually, and single men by an additional 1.4 percentage points.

If 1 percentage point — compounded year after year — strikes you as an inconsiderable amount, consider the effort you would expend to save 1 percentage point on a home mortgage. In short, trading is a mistake made by both men and women; men simply make more mistakes than women.

Overconfidence and Diversification

Overconfident investors underdiversify. If you know you are right, what’s the point of hedging your bets? In a typical month, the median investor in our sample held three common stocks. Of course, some achieved diversification by also owning mutual funds, and others may have owned stocks at other brokerages. While overconfidence accounts for some underdiversification, it is likely that many investors simply don’t understand the advantages of holding a diversified portfolio. In 1999, the S&P 500 index returned 21 percent. Eight stocks accounted for half of that gain. At the end of 1999, 230 of the S&P 500 stocks were below their level of two years earlier. An investor who held only three S&P 500 stocks during this period had a 4.1 percent chance of holding at least one of the big eight winners and a 9.6 percent chance of holding only losers. Thus, in the midst of a bull market, an undiversified investor was more than twice as likely to be left at the starting gate as to win the sweepstakes.

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Executive Summary

Unemployment has attracted much attention, but there has been less consideration of how older workers have fared. In past recessions unemployment has remained relatively low for older workers, whose seniority often protected them during rounds of layoffs. However, age might not protect older workers as well as it once did, because workplaces are now less regularized and labor unions are less powerful. And the 2008 stock market collapse, which wiped out trillions of dollars of retirement savings, appears to have raised fears about the affordability of retirement and discouraged many older workers from leaving the workforce.

This report describes how older workers fared in 2009. It focuses on age differences in unemployment rates (the share of the workforce that is out of work and looking for employment), labor force participation rates (the share of the population that is employed or unemployed), employment rates (the share of the population that is employed), the duration of unemployment spells, and earnings. Analyses compare 2009 outcomes with those in 2007, when unemployment fell to its lowest level after the 2001 recession. Data come from the Current Population Survey, a monthly survey of about 50,000 households that serves as the basis for the federal government's official unemployment statistics.

Unemployment rates for older workers soared in 2009, although they were even higher for younger workers. Older unemployed workers were more likely than their younger counterparts to be out of work for many months.

• On average, 1.5 million workers age 55 to 64 and 421,000 workers age 65 and older were unemployed each month in 2009, more than double the number in 2007.
• The unemployment rate reached all-time highs (since records began in 1948) for older men and women. The 2009 unemployment rate was 7.2 percent for men age 55 to 64 and 6.7 percent for men age 65 and older. For women, the 2009 unemployment rate was 6.0 percent at age 55 to 64 and 6.1 percent at age 65 and older.
• Unemployment rates were much higher at younger ages in 2009. The unemployment rate at age 35 to 44 was 7.9 percent, for example, exceeding the rate at age 55 to 61 by 18 percent and the rate at age 70 to 74 by 30 percent.
• Unemployment in 2009 was more common for men than women of all ages — including older adults — because the recession hit male-dominated industries like construction and manufacturing particularly hard. In 2009, 14.3 percent of construction workers age 55 and older and 10.9 percent of older manufacturing workers were unemployed, well above the overall 2009 unemployment rate of 6.5 percent for adults age 55 and older.
• Construction, manufacturing, trade, and professional and business services accounted for nearly two-thirds of unemployed men age 55 and older in 2009. About two-thirds of unemployed women age 55 and older in 2009 came from trade, professional and business services, health care, manufacturing, and education.
• As in past years, 2009 unemployment rates were much higher among older African Americans, Hispanics, and workers with limited education than other older workers. Among men age 55 to 64, for example, about 11 percent of Hispanic workers and 10 percent of African American workers were unemployed, compared with 6 percent of non- Hispanic white workers. About 10 percent of female workers age 55 to 64 without high school diplomas were unemployed in 2009, compared with about 5 percent of their counterparts with college degrees.
• Older unemployed workers spent more time out of work in 2009 than their younger counterparts. More than two-fifths of out-of-work men age 62 to 69 in 2009 were unemployed for more than six months, compared with just less than one-third of out-of-work men age 35 to 44. In December 2009, nearly half of unemployed men age 55 to 61 were out of work for more than six months.

Other 2009 developments were more positive for older workers. The share of adults employed fell at age 25 to 54 but not at age 62 and older. Also, earnings for full-time workers age 65 and older grew rapidly between 2007 and 2009.

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The Federal Reserve's new rules for credit card companies mean new credit card protections for you. Here are some key changes you should expect from your credit card company beginning on February 22, 2010.

What your credit card company has to tell you

• When they plan to increase your rate or other fees. Your credit card company must send you a notice 45 days before they can increase your interest rate;
• change certain fees (such as annual fees, cash advance fees, and late fees) that apply to your account; or
• make other significant changes to the terms of your card.

If your credit card company is going to make changes to the terms of your card, it must give you the option to cancel the card before certain fee increases take effect. If you take that option, however, your credit card company may close your account and increase your monthly payment, subject to certain limitations.

For example, they can require you to pay the balance off in five years, or they can double the percentage of your balance used to calculate your minimum payment (which will result in faster repayment than under the terms of your account). The company does not have to send you a 45-day advance notice

• if you have a variable interest rate tied to an index; if the index goes up, the company does not have to provide notice before your rate goes up;
• your introductory rate expires and reverts to the previously disclosed "go-to" rate;
• your rate increases because you are in a workout agreement and you haven’t made your payments as agreed.

How long it will take to pay off your balance. Your monthly credit card bill will include information on how long it will take you to pay off your balance if you only make minimum payments. It will also tell you how much you would need to pay each month in order to pay off your balance in three years. For example, suppose you owe $3,000 and your interest rate is 14.4% -- your bill might look like this:

New Balance:   $3,000.00

Minimum payment due:   $90.00

Payment due date:   4/20/12

Late Payment Warning:  If we do not receive your minimum payment by the date  listed above, you may have to pay a $35 late fee and your APRs may be  increased  up to the Penalty APR of 28.99%.

Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance.

New rules regarding rates, fees, and limits

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"Among the issues addressed in the survey was the provocative question raised by eminent tech scholar Nicholas Carr in a cover story for the Atlantic Monthly magazine in the summer of 2009:  'Is Google Making us Stupid?'  Carr argued that the ease of online searching and distractions of browsing through the web were possibly limiting his capacity to concentrate. 'I'm not thinking the way I used to,' he wrote, in part because he is becoming a skimming, browsing reader, rather than a deep and engaged reader. 'The kind of deep reading that a sequence of printed pages promotes is valuable not just for the knowledge we acquire from the author's words but for the intellectual vibrations those words set off within our own minds. In the quiet spaces opened up by the sustained, undistracted reading of a book, or by any other act of contemplation, for that matter, we make our own associations, draw our own inferences and analogies, foster our own ideas ....  If we lose those quiet spaces, or fill them up with ‘content,' we will sacrifice something important not only in our selves but in our culture.'

Respondents were also asked to "share your view of the internet's influence on the future of human intelligence in 2020 — what is likely to stay the same and what will be different in the way human intellect evolves?" What follows is a selection of the hundreds of written elaborations and some of the recurring themes in those answers:

Nicholas Carr and Google staffers have their say:

• "I feel compelled to agree with myself. But I would add that the Net's effect on our intellectual lives will not be measured simply by average IQ scores. What the Net does is shift the emphasis of our intelligence, away from what might be called a meditative or contemplative intelligence and more toward what might be called a utilitarian intelligence. The price of zipping among lots of bits of information

• "My conclusion is that when the only information on a topic is a handful of essays or books, the best strategy is to read these works with total concentration. But when you have access to thousands of articles, blogs, videos, and people with expertise on the topic, a good strategy is to skim first to get an overview. Skimming and concentrating can and should coexist. I would also like to say that Carr has it mostly backwards when he says that Google is built on the principles of Taylorism [the institution of time-management and worker-activity standards in industrial settings]. Taylorism shifts responsibility from worker to management, institutes a standard method for each job, and selects workers with skills unique for a specific job. Google does the opposite, shifting responsibility from management to the worker, encouraging creativity in each job, and encouraging workers to shift among many different roles in their career .... Carr is of course right that Google thrives on understanding data. But making sense of data (both for Google internally and for its users) is not like building the same artifact over and over on an assembly line; rather it requires creativity, a mix of broad and deep knowledge, and a host of connections to other people. That is what Google is trying to facilitate." — Peter Norvig, Google Research Director

• "Google will make us more informed. The smartest person in the world could well be behind a plow in China or India. Providing universal access to information will allow such people to realize their full potential, providing benefits to the entire world." — Hal Varian, Google, chief economist

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