Rationalizing Trading Frequency and Returns : Maybe Trading is Good for You

Barber and Odean (2000) find that households who trade more have a lower net return than others and attribute this pattern to irrationality, particularly overconfidence. In contrast, we find that household financial choices generated from a dynamic optimization problem with rational agents and portfolio adjustment costs can reproduce the observed pattern of households with large turnover having lower net returns. Various forms of irrationality, modeled as beliefs about income and return processes that are not data based, do not improve the ability of the baseline model to explain these turnover and net returns patterns.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at "http://www.nber.org/papers/w25838"