Financial speculators' underperformance: Learning, self-selection, and endogenous liquidity

Reza Mahani, Dan Bernhardt

Research output: Contribution to journalArticlepeer-review


We develop an equilibrium model of learning by rational traders to reconcile several empirical regularities: Cross sectionally, most individual speculators lose money; large speculators outperform small speculators; past performance positively affects subsequent trade intensity; most new traders lose money and cease speculation; and performance shows persistence. Learning from trading generates substantial endogenous liquidity, reducing bid-ask spreads and the impact of exogenous liquidity shocks on asset prices, but amplifying the effects of real shocks. Introducing slightly overconfident traders increases bid-ask spreads, hurting all traders. Finally, behavioral theories cannot reconcile all of these empirical regularities.

Original languageEnglish (US)
Pages (from-to)1313-1340
Number of pages28
JournalJournal of Finance
Issue number3
StatePublished - Jun 2007

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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