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Do portfolio distortions reflect superior information or psychological biases?

Version 2 2024-06-13, 10:28
Version 1 2017-03-31, 13:17
journal contribution
posted on 2024-06-13, 10:28 authored by GM Korniotis, A Kumar
Using a demographics-based proxy for smartness, we show that the portfolio distortions of smart investors reflect an informational advantage, while the distortions of dumb investors reflect psychological biases. Specifically, smart investors outperform dumb investors by about 3% annually on a risk-adjusted basis. Furthermore, among investors with high portfolio distortions, smart investors outperform passive benchmarks by 2%, and the smart-dumb performance differential is 5%. At the stock level, a portfolio of stocks with smart investor clientele outperforms the dumb clientele portfolio by 3.50% annually. These findings suggest that behavioral and information-based explanations for portfolio distortions apply to distinct subsets of investors.

History

Journal

Journal of financial and quantitative analysis

Volume

48

Pagination

1-45

Location

Cambridge, Eng.

ISSN

0022-1090

eISSN

1756-6916

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal, C Journal article

Copyright notice

2013, Michael G. Foster School of Business, University of Washington

Issue

1

Publisher

Cambridge University Press