Affinity for Familiar Stocks

Individual investors are about 50% more likely to buy a stock that they have held before, as compared to a new stock.

Familiarity

The above graph plots the affinity for 225 stocks sorted by daily trading volume in the Finnish market between 1995 and 2009. The indexes on the horizontal axis are corresponding to each stock. So stock#1 is the most traded and stock#225 is least traded. The orange plot is the estimated probability that a bought stock is familiar, assuming individual does not have any additional affinity to buy familiar stocks. (This is downward sloping as highly trader stocks are mechanically more likely to be encountered repeatedly and thus more likely to be familiar.) The blue line corresponds to estimated probability that the stock bought by an individual is in fact familiar. The plot thus shows that individuals have strong affinity to buy familiar stocks, irrespective of the stocks trading volume.

I define a stock to be familiar to an individual, if it is among the last ten stocks the individual has traded. It is robust to other measures of familiarity- stocks encountered in last ten trades (typically less than ten stocks) or stocks encountered in the past one year.

More details forthcoming.

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