Are Trading Costs Invisible in Trading Decisions?

We examine whether or not professional traders recognize transaction costs when making trade decisions. In both single and multi-period settings, professional traders are far more reluctant to realize a gross loss rather than an actual loss (net of transaction costs). The tendency to ignore transaction costs leads to higher levels of overconfidence (or trading activity) because traders are more susceptible to misinterpret negative performance outcomes for positive ones. We find that traders who experience higher and more frequent gross trading profits trade more actively, but they also end up losing the most money on a net basis