Extrapolators and contrarians: Forecast bias and individual investor stock trading

We test whether forecast bias affects individual investors’ stock trading by combining bias measures from laboratory experiments with administrative trade data. Forecast bias is positively associated with past excess returns of purchased stocks: Compared to contrarians, extrapolators purchase stocks with higher past returns. Forecast bias is negatively associated with capital gains of sold stocks. Forecast bias also explains investor heterogeneity in the relation between market returns and net flows. Taken together, forecast bias provides a unifying mechanism through which different salient performance measures — past stock returns, capital gains, and past market returns — shape corresponding purchase, sale, and net flow decisions.