This version:12 October 2005 Rational or behavioral investors? Financial information and portfolio performance Luigi Guiso University of Sassari, Ente Luigi Einaudi for Monetary, Banking and Financial Studies, and CEPR Tullio Jappelli University of Salerno, CSEF, and CEPR Abstract Rational investors perceive correctly the value of information. Investment in information is therefore rewarded with a higher Sharpe ratio. Overconfident investors overstate the quality of information, and attain a lower Sharpe ratio. We contrast the implications of the two models using a survey of customers of an Italian leading bank with portfolio data and measures of financial information. We find that the Sharpe ratio is negatively associated with information investment. The negative correlation is stronger for men than women, for those who believe they know stocks well and for the less well educated, arguably because these groups of investors are more likely to be overconfident. We also show that more information is associated with more trading, less delegation of portfolio decisions and less diversified portfolios. In each case, the effect of information is stronger for investors who, a priori, are suspected to be more overconfident. JEL: E2, D8, G1 Keywords: portfolio choice, rationality, overconfidence, behavioral finance Acknowledgments. We thank Uri Gneezy, Joel Peress and seminar participants at the Chicago Business School and Dartmouth College for comments. This work has been partly supported by the European Community’s Human Potential Programme under contract HPRN-CT-2002-00235 (AGE) and by the Italian Ministry of Education, Universities and Research (MIUR).