We examine the behavior and performance of individual investors in Japan. In empirical tests
using market level data, we find that Japanese individual investors own risky and high book-tomarket
stocks, trade frequently, make poor trading decisions, and buy recent winners. Further,
these behaviors and characteristics appear to vary depending on the bull or bear market
conditions. As such, we believe our results provide important additional insights into the
behaviors of individual investors. Interestingly, we also observe that it is primarily during a bull
market where individuals tend to hold high book-to-market stocks, as opposed to a bear market
where they exhibit an inclination toward high beta stocks. Overall, the poor performance by
individual investors can largely be explained by this tendency to hold value stocks during
advancing markets and high risk stocks during declining stocks. Finally, the fact that these
behaviors reveal themselves at the market level also represents an important finding.
Key words: Individual investors; Overconfidence