Retail investors often learn the wrong lessons from success | The Economist

Retail investors often learn the wrong lessons from success

A study of Indian IPOs suggest investors confuse luck with skill

IT IS better to be lucky than good. This is the customary quip of poker players who owe success in a big pot to an improbable draw from the deck. In card games it is usually clear whom fortune has favoured. Not so in investing. The randomness of financial markets makes it hard to distinguish a good investor from a lucky one. It is especially hard for people to assess their own skills.

This long-understood problem has fresh resonance. In the spring no-cost brokerages that cater to small investors reported a surge in new accounts and in trading activity. Many of these newbie investors made money. “Learning from Noise”, a forthcoming paper in the Journal of Financial Economics by Santosh Anagol, Vimal Balasubramaniam and Tarun Ramadorai, sheds light on how these investors might misinterpret their success. Their study's main finding is that retail investors who were randomly allocated shares in successful Indian IPOs view their good fortune as evidence of skill. There are dangers for new investors in misunderstanding the markets. But the bigger hazard might lie in misunderstanding themselves.

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