Combining survey responses and trading records of clients of a German retail broker, this paper examines some of the causes for the apparent failure to buy and hold a well-diversified portfolio. The subjective investor attributes gleaned from the survey help explain the variation in actual portfolio and trading choices. Self-reported risk aversion is the single most important determinant of both portfolio diversification and turnover; other things equal, investors who report being more risk tolerant hold less diversified portfolios and trade more aggressively. Less experienced investors similarly tend to churn poorly diversified portfolios. The effect of perceived knowledge on portfolio choice is less clear cut; holding other attributes constant, investors who think themselves knowledgeable about financial securities indeed hold better diversified portfolios, but those who think themselves more knowledgeable than the average investor churn their portfolios more.

We hypothesize that vanity amplifies realization utility in teams; admitting mistakes is particularly painful when mistakes have to be admitted to self and colleagues. Consistent with the Vanity hypothesis, U.S. stock funds run by teams hold on to losers when losers were initiated by a subset of the team (to avoid admitting a mistake to their non-initiating colleagues), when initiators of loser positions are more experienced (to avoid losing authority by admitting mistakes to junior colleagues), and when all colleagues agree that a position is a loser. Vanity is costly – losers held underperform by a risk-adjusted 1% annually.

The disposition effect is a longstanding puzzle in financial economics. This paper demonstrates that it is not intrinsically at odds with rational behavior. In a rational expectations model with asymmetrically informed investors, trading strategies as predicted by the disposition effect can arise as an optimal response to dynamic changes in the information structure. The model predicts that the disposition behavior of uninformed investors weakens after events that reduce information asymmetries. The data, trading records of 50,000 clients at a German discount brokerage firm from 1995 to 2000, are consistent with this prediction.