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Do Portfolio Distortions Reflect Superior Information or Psychological Biases?

Published online by Cambridge University Press:  07 January 2013

George M. Korniotis  and
Alok Kumar
George M. Korniotis
Affiliation:
gkorniotis@miami.edu
Alok Kumar
Affiliation:
akumar@miami.edu, School of Business Administration, University of Miami, PO Box 248027, Coral Gables, FL 33124.
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Abstract

Using a demographics-based proxy for smartness, we show that the portfolio distortions of “smart” investors reflect an informational advantage, while the distortions of “dumb” investors reflect psychological biases. Specifically, smart investors outperform dumb investors by about 3% annually on a risk-adjusted basis. Furthermore, among investors with high portfolio distortions, smart investors outperform passive benchmarks by 2%, and the smart-dumb performance differential is 5%. At the stock level, a portfolio of stocks with smart investor clientele outperforms the dumb clientele portfolio by 3.50% annually. These findings suggest that behavioral and information-based explanations for portfolio distortions apply to distinct subsets of investors.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 1 , February 2013 , pp. 1 - 45
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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