Traders tend to be overconfident and discount what they don’t know about the market and individual securities. They see patterns instead of random noise. And they have a hard time admitting their losses and focus too much on gains.
In summarizing the science of behavioral finance, Statman says we’re pretty much hard-wired to consistently make these mistakes — and lose money. Since we tend to think of ourselves as better than average on most everything from driving to investing, it clouds our rational judgment. A body of research has found this to be particularly true when it comes to amateur stock traders.
Statman said that average returns of frequent traders “lag those of infrequent traders and the average returns of infrequent traders lag average returns of investors who abstain from trading.”