Volatility in returns from trading

Odean [1999] observes that naive investors tend to trade too often, but we know little about what motivates them and why their performance is often so poor. This paper describes an experiment where naive traders take part in a share market game with limited information, unlimited credit, and unlimited short-selling. We find that trading profit volatility is positively correlated with the level of understanding of the market, the level of self-efficacy or self-confidence, and the level of trading. Large profits and losses tend to be earned by individuals who trade heavily and have a reasonable understanding of how the market works and how shares are valued. There is also some evidence that a high level of self-efficacy is positively correlated with trading profit volatility.