Affiliations: Finance Department, San Francisco State University, San Francisco, CA, 94122. 1600 Holloway Street. San Francisco, CA 94122, USA. Phone: 415-816-6632, Email: [email protected]
Note:  I thank colleagues Alan Jung and Deniz Tudor for their helpful insights. I would like to thank comments from participants from the 2011 Eastern Finance Association conference. I retain sole responsibility for remaining idiosyncrasies and errors.
Abstract: Research indicates that individual investors trade excessively and underperform the market indices, Barber and Odean (2000). The purpose of this paper is to help explain which behavioral biases, if any, can explain this result using a simulation approach. Results indicate that putting too much weight on the current environment, anchoring, is the largest factor in explaining individual investor underperformance. In addition, loss aversion is the largest factor to explain excessive trading. When these two biases are combined trading activity and underperformance are heightened.