Smoking hot portfolios? Overtrading from self-control failure

Arbeitspapier

Psychology considers self-control failure, i.e., the inability to resist certain behaviors and impulses when seeking to achieve future goals as a major human pathology. The finance literature models and applies self-control failure to explain time-inconsistent behavior such as under-saving and nonparticipation decisions as a result of present bias due to hyperbolic discounting. However, literature does not investigate whether and to what extent self-control failure affects investment behavior among those who have positive savings and stockholdings. We fill this gap by identifying smoking as the most socially accepted example of present-biased preferences and link it to trading records. We compare trading behavior in the investment portfolio between 3,553 smokers and 10,091 nonsmokers over six years and show that the proportion and demographic characteristics of smokers are consistent with German survey data and federal statistics. Smoking as a proxy for self-control failure is associated with a higher number of trades per month, higher trading volume, and higher portfolio turnover and not explained by other biases such as overconfidence, social contagion, sensation seeking, or attention grabbing. But we find that self-control failure exacerbates these other biases. We show that self-control failure is costly because it increases the gap between the gross and net returns of smokers relative to nonsmokers.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SAFE Working Paper ; No. 245

Classification and Topics

• Classification: Wirtschaft ; Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets‡ ; Household Saving; Personal Finance ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Portfolio Choice; Investment Decisions
• Subject: self-control ; individual investor ; trading behavior

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Uhr, Charline ; Meyer, Steffen ; Hackethal, Andreas
• Event: Veröffentlichung
• (who): Goethe University Frankfurt, SAFE - Sustainable Architecture for Finance in Europe
• (where): Frankfurt a. M.
• (when): 2019

Further information

• DOI: doi:10.2139/ssrn.3347625
• Handle: http://hdl.handle.net/10419/204483
• Last update: 10.03.2025, 11:44 AM CET