Behavior and performance of emerging market investors: Evidence from China

We study brokerage account data from China to study investing behavior and trading performance in an emerging market. Chinese stock markets are new, so we assume that Chinese investors are less experienced about investing as compared to investors from more capitalistic oriented societies. We find that Chinese investors exhibit behavioral biases (i.e., they seem overconfident, inclined toward a disposition effect, and exhibit representativeness bias) and make poor trading decisions. We then propose five measures of investor experience where (1) investors who have accumulated some investing experience, (2) younger investors, (3) active investors, (4) investors with more wealth, and (5) investors from the more cosmopolitan Chinese cities, are assumed to be more sophisticated about investing than other Chinese investors. We find strong evidence that more experienced investors are more inclined toward making trading mistakes, exhibiting the disposition effect, and suffering from representativeness bias. We find mixed evidence that experience mitigates overconfidence. Overall, we conclude that investor sophistication does not necessarily mitigate behavioral biases, nor improve trading performance. JEL classification: G10