Financial overconfidence over time: Foresight, hindsight, and insight of investors

Christoph Merkle

Journal of Banking & Finance, 2017, vol. 84, issue C, 68-87

Abstract: Financial overconfidence leads to increased trading activity, higher risk taking, and less diversification. In a panel survey of online brokerage clients in the UK, we ask for stock market and portfolio expectations and derive several overconfidence measures from the responses. Overconfidence is identified in the sample in various forms. By matching survey data with participants’ transactions and portfolio holdings, we find an influence of overplacement on trading activity, of overprecision and overestimation on diversification, and of overprecision and overplacement on risk taking. We explore the evolution of overconfidence over time and identify a role of past success and hindsight on subsequent investor overconfidence in line with learning to be overconfident.

Keywords: Overconfidence; Trading; Diversification; Risk taking; Expectations (search for similar items in EconPapers)
JEL-codes: D14 G02 G11 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:84:y:2017:i:c:p:68-87

DOI: 10.1016/j.jbankfin.2017.07.009

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