Overconfidence in Investing: The Cost of Trading More

Key takeaways

• Men in Barber and Odean's 35,000-household sample traded 45% more than women and cut net returns by 2.65 points a year against 1.72 for women.
• Stocks these investors bought trailed the ones they sold by 3.22 percentage points over the next 252 trading days, before a penny of trading cost.
• Switching to online trading lifted average annual turnover from 73.7% to 95.5%, and the same investors went from beating the market to lagging it.
• In Taiwan from 1995 to 1999, commissions and transaction taxes made up 66% of the 3.8-point annual penalty individual investors paid.
• Grinblatt and Keloharju found each extra speeding ticket raised turnover by about 3.6 points a year, so turnover may track thrill-seeking as much as confidence.

Two people open accounts at the same discount broker in the same month. They read the same things and end up owning much the same stocks. One of them acts on every view he forms. The other acts about half as often. Six years later, which of them has more money — and which would you rather have been?

The largest tests of that question all land in the same place, and it isn't the flattering one. Men in one large US brokerage sample traded 45% more than women. That cost them 2.65 percentage points a year in net returns, against 1.72 points for the women. Their stock picks weren't measurably worse. They simply acted on them more often.

That gap is the cleanest published test of an old idea: that investors trade far more than their circumstances warrant because they overrate what they know. Your own rebalancing, tax and cash needs can't explain volume like that, and nor can anybody else's. Something psychological is filling the gap, and overconfidence is the leading candidate.

How much portfolio turnover are we actually talking about?

Barber and Odean's 1999 working paper on a large US discount broker put the average household's annual common stock turnover above 75%. The quintile that traded most turned over more than 250% of its portfolio a year. As a reference point, the New York Stock Exchange itself reported turnover of 76% in 1998.

Turnover of 75% means the average household replaced three quarters of its share portfolio every twelve months. Your liquidity needs don't move that fast. Nobody's do. Odean's blunt version of the objection is that liquidity shocks as an explanation for 250% annual turnover belie common sense.

The costs of that activity in the 1990s were heavy. In the same sample, the trade-weighted round trip cost roughly 1% in bid-ask spread and about 3% in commissions. In Odean's earlier study of 10,000 accounts at a nationwide discount broker, the average commission was 2.23% on a purchase and 2.76% on a sale, plus an estimated 0.94% effective spread. Round trip: about 5.9%.

Say you had held an illustrative £10,000 of shares at that broker and rotated the lot once in a year. Nothing clever, no leverage, just one full turn of the holdings. The round trip takes about 5.9% of what you moved — most of six hundred pounds, gone before the stocks you bought have done anything at all. Now picture the busiest quintile doing that two and a half times over.

Where the money went: the cost of trading, itemised

Here's the part that shapes everything after it. Across the broker sample, gross returns were fine. The market's annualised geometric mean return was 17.9%; the average household earned 18.7% before costs and 16.7% in aggregate after them. Barber and Odean also report very little difference in gross performance between households with monthly turnover above 8.8% and those who barely traded.

Read narrowly, that says the damage is friction, not judgement. Trade less and you keep more, because you pay less. It's the same accounting that drives the gap between what funds return and what bad timing costs the investors who own them.

But Odean's 1999 paper tested something sharper. Did the stocks these investors bought beat the stocks they sold at all, before a penny of cost? Over the 252 trading days after a trade, market-adjusted returns to purchases came in 3.22 percentage points below returns to sales, with a bootstrapped p-value under 0.001. The buys weren't good enough to pay for the trading. On this evidence they weren't good enough full stop, whatever you paid.

He then stripped out the innocent reasons to trade. He kept only purchases made within three weeks of a sale, only sales made at a profit, only sales of a complete position, and only cases where the stock bought was the same size decile or smaller than the one sold. That removes most liquidity, tax-loss, rebalancing and risk-reduction motives at once. The gap got worse, not better: 5.82 points over a year, on 7,503 purchases and 5,331 sales.

Odean's own reading is stricter than the popular summary. Overconfidence about the precision of your information, on its own, only predicts that you'll pay too much in costs. To lose money before costs, you have to be misreading the information itself.

The gender test, and what it does and doesn't show

The 2001 Quarterly Journal of Economics paper split more than 35,000 discount brokerage households by the gender of whoever opened the first account, then tracked them from February 1991 to January 1997. Psychologists had already found that confidence gaps between men and women are largest for tasks seen as male-coded, and largest again where feedback is slow and noisy. Stock picking is both.

Mean monthly turnover came out at 6.41% for men and 4.40% for women. Among single households the gap widened: 7.05% against 4.22%, or 67% more trading. Net of costs, men gave up 2.65 percentage points a year to trading and women 1.72.

The detail that matters most is the one usually left out. Stocks men bought underperformed the stocks they sold by 20 basis points a month. For women the figure was 17 basis points. The difference between those two isn't statistically significant. Men didn't choose worse. They chose more often, and every one of those choices carried a cost you can measure.

The authors also had survey evidence. Gallup ran a poll for PaineWebber fifteen times between June 1998 and January 2000, roughly 1,000 respondents each time. Both men and women expected their own portfolios to beat the market over the coming year. Men expected to beat it by 2.8 points, women by 2.1, a difference significant at t = 3.3. Almost nobody expected to be average. If a pollster rang you tomorrow, what would you have said?

Two caveats belong next to those numbers. The sample is discount brokerage customers, who are not the general investing population, and the return window closes in January 1997. Odean also notes that closed accounts were not replaced, so the later years carry some survivorship bias toward investors who did well.

The natural experiment nobody planned

The strongest causal evidence comes from a change in plumbing. Barber and Odean tracked 1,607 investors at the same broker who switched from phone-based to online trading during the 1990s.

Imagine you were one of them. Before the switch these people were good, beating the market by more than 2% a year. Then the trade moved from a phone call to a screen. Their average annual turnover rose from 73.7% to 95.5%, their speculative turnover nearly doubled from 16.4% to 30.2%, and they lagged the market by more than 3% a year. Size-matched investors who never went online saw turnover drift down over the same window, from 53.2% to 48.2%.

The obvious explanation is that trading got cheaper, so they did more of it. The paper checks. Round-trip commissions for the switchers fell from 3.265% to 2.507% and round-trip spreads from 1.133% to 0.859%. Cheaper, yes. Not cheap enough to explain a swing of five percentage points in relative performance. The authors reach instead for self-attribution: people who had just been right about the market concluded they were skilful, and a faster tool let them act on it.

So that's three results pointing one way: more trading, less money, and no sign the extra trades were better ones. What's disputed from here isn't the pattern. It's the name you hang on the cause.

The case against reading turnover as overconfidence in investing

Gender is a proxy, not a measurement. Grinblatt and Keloharju went after the thing directly, using Finnish trading records linked to tax filings, driving records and the psychological profile every Finnish male sits at around age 19 for the armed forces. One scale on that test measures self-confidence from 1 to 9. They treat the part of it left unexplained by measured intellectual ability, income and life outcomes as overconfidence.

They also had a second variable: speeding convictions, as a proxy for sensation seeking. Each extra ticket raised the probability of trading by 4.7%, the number of trades by 9.8%, and turnover by roughly 3.6 percentage points a year from a base near 40%.

So which is it — a belief about your own judgement, or an appetite for stimulation? When both variables ran together, the result cut against the standard story. Sensation seeking stayed significant for the number of trades and for turnover. Overconfidence was significant for whether someone traded at all, but only marginally insignificant for turnover itself. The authors argue that it's equally plausible the Barber and Odean gender result reflects a gender difference in sensation seeking rather than in overconfidence.

Two other studies point the same way, and I've read only their published abstracts, so take them at that weight. Glaser and Weber surveyed around 3,000 online broker clients and matched 215 of them to trading records. Investors who thought they were above average traded more. Miscalibration, which is the version of overconfidence the theory actually models, was unrelated to trading volume.

That split is worth holding on to, because the two things feel identical from the inside. Thinking you're better than average is easy to catch yourself doing. Thinking your estimates are sharper than they really are isn't, and the second one is what the models are built on.

Cueva, Iturbe-Ormaetxe, Ponti and Tomás ran an experiment with incentivised confidence measures taken before a simulated market. Men were more confident and traded more, but the abstract reports that confidence differences did not account for the trading gap, and that risk aversion, financial literacy and competitiveness were unlikely to either.

So the pattern is solid and the label is contested. Trading more predicts earning less. Whether the driver is overconfidence, thrill-seeking, boredom or something not yet named is genuinely open.

The other objection: trading is nearly free now

The second challenge is arithmetic. If most of the penalty was friction, and friction has collapsed, shouldn't the penalty have collapsed with it?

The Taiwan evidence makes that case better than any critic could. Using every trade on the Taiwan Stock Exchange from 1995 to 1999, Barber, Lee, Liu and Odean found individual investors lost 3.8 percentage points a year in aggregate, worth 2.2% of Taiwan's GDP and 2.8% of total personal income. Where that loss went is the interesting bit.

Two thirds of the damage was cost and tax — the part of the bill you pay whether your call was right or wrong. Institutions, meanwhile, gained 1.5 points a year after their own commissions and taxes.

Strip commissions to zero and that 3.8-point penalty shrinks a long way. US brokers moved to commission-free equity trading, and Taiwan's exchange turnover in that window averaged 294% a year, which no modern retail market approaches. Frictions are lower now, and if you compare your own turnover with a 1990s figure you aren't comparing like with like. Priced from UK schedules read in August 2026, the cost of frequent trading is 0.73% of every pound moved, and stamp duty is 68% of that.

Two things blunt the objection. First, taxes didn't vanish. UK investors still pay 0.5% Stamp Duty Reserve Tax on electronic share purchases, and 0.5% Stamp Duty on stock transfer forms above £1,000, per HMRC guidance current in August 2026. That's a real cost on every buy, and it scales directly with how often you trade. Outside the UK the arithmetic changes again, because stamp duty on shares runs from nothing in the United States to 1% in Ireland.

Go back to that illustrative £10,000. Rotate it once a year and the stamp duty on your purchases is fifty pounds. Rotate it two and a half times, the way the busiest quintile did, and the same tax takes a hundred and twenty-five. Your commission bill is zero in both cases. The tax bill isn't, and nothing about it depends on whether the trades were any good.

Second, and more damaging, the pre-cost evidence never depended on commissions. Odean's 3.22-point gap is measured on market-adjusted returns before trading costs. The zero-commission era has produced its own version. Barber, Huang, Odean and Schwarz tracked Robinhood user counts from May 2018 to August 2020 and defined a herding episode as the top 0.5% of daily percentage increases in users holding a stock, about ten a day and roughly 5,000 in all. Those stocks lost 3.55% in abnormal returns over five days and 4.74% over twenty. Nearly two thirds were negative at day twenty. Robinhood users concentrated 35% of net buying in ten stocks against 24% for retail investors generally.

Commissions there were zero. The losses weren't. That paper measures user counts rather than dollar trades, it covers a wild 26-month window, and its subject is attention rather than confidence, so it's supporting evidence and not a replication.

High turnover isn't uniformly overconfidence, and investing evidence says so

One more finding keeps the picture honest. Barber, Lee, Liu and Odean also studied Taiwanese day traders from 1992 to 2006. In an average year 360,000 individuals day traded, accounting for 17% of exchange volume, and about 13% of them made money net of fees in a typical year.

Sort them by last year's returns, though, and the top 500 go on to earn 49.5 basis points a day before fees and 28.1 after. The worst-ranked go on to lose 17.5 before fees and 34.2 after. Fewer than 1% of day traders, roughly 1,000 out of 360,000, repeat reliably. So skill is real, and if you have it the data will eventually say so. How sure are you that you are in that thousand rather than among the rest? That question is the whole subject of this piece.

Where these numbers come from

If you want to check any of this yourself, here's exactly what it's built from. The turnover, cost and return figures are read from the tables of Odean's 1999 paper, the 2001 gender study, the paper on investors who moved online, and the two Taiwan datasets, all linked at the foot of the page. The Finnish results are Grinblatt and Keloharju's. Two studies are quoted from their published abstracts rather than their full text, and both are flagged as such where they appear.

What would change the overconfidence in investing conclusion

Three findings would move this materially.

A modern account-level dataset built on the near-zero commissions you pay now, showing high-turnover retail accounts matching low-turnover ones after costs would kill the friction channel outright, leaving the selection channel to carry the whole result. That test hasn't been published at the scale of the 1990s brokerage studies, and the Robinhood work is a poor substitute because it tracks stocks rather than accounts.

A run of direct overconfidence measures that keeps failing to predict turnover would mean the mechanism is mislabelled even where the pattern holds. Grinblatt and Keloharju, Glaser and Weber, and Cueva and colleagues each land partway there already. If sensation seeking wins that race, the practical implication changes: what you'd be managing is a taste for stimulation, not a belief about skill.

And a failure to reproduce Odean's pre-cost gap outside the 1987 to 1993 US discount-broker window would undercut the strongest claim in the literature. The Taiwan and Finland work is consistent with it, but those are different markets with different microstructure.

What wouldn't change it is cheaper dealing. Free trades fix the commission line and nothing else. If the stocks you buy trail the stocks you sell by three points a year before costs, paying nothing to make the swap doesn't help. That's also why the pre-commitment literature matters more than the fee literature here, and why the evidence on writing an investment policy statement and the comparison of annual rebalancing against 5% threshold bands both approach the problem by removing discretion rather than by making it cheaper to exercise.

So, back to the two accounts opened in the same month. The finding that has survived every recut since 1999 is narrow and durable. Across large samples, in several countries, the investor who trades more ends up with less, and the gap doesn't come from picking worse. It comes from picking more often, on evidence that was never strong enough to act on.