Journal of Financial and Quantitative Analysis

Research Articles

Hard-to-Value Stocks, Behavioral Biases, and Informed Trading

Alok Kumara1

a1 McCombs School of Business, University of Texas at Austin, 1 University Station, B6600, Austin, TX 78712.


This paper uses investor-level data to provide direct evidence for an intuitive but surprisingly untested proposition that investors make larger investment mistakes when valuation uncertainty is higher and stocks are more difficult to value. Using multiple measures of valuation uncertainty and multiple behavioral bias proxies, I show that individual investors exhibit stronger behavioral biases when stocks are harder to value and when market-level uncertainty is higher. I also find that informed trading intensity is higher among stocks where individual investors exhibit stronger behavioral biases. Collectively, these results indicate that uncertainty at both stock and market levels amplifies individual investors’ behavioral biases and that relatively better informed investors attempt to exploit those biases.


I thank Warren Bailey, Stephen Brown (the editor), Sudheer Chava, Shane Corwin, John Griffin, Jeff Hales, David Hirshleifer, George Korniotis, Sonya Lim, David Ng, Sergei Sarkissian, Paul Schultz, Mark Seasholes, Sophie Shive, Andrei Simonov (the referee), Avanidhar Subrahmanyam, Paul Tetlock, and seminar participants at Notre Dame for helpful discussions and valuable comments. Jeremy Page, Donna Xu, and Margaret Zhu provided excellent research assistance. I also thank Itamar Simonson for making the investor data available to me and Terrance Odean for answering numerous questions about the investor database. I am responsible for all remaining errors and omissions. Previous versions of the paper circulated under the titles “When Do Individual Investors Exhibit Stronger Behavioral Biases?” and “Valuation Uncertainty and Behavioral Biases.”