How does investor confidence lead to trading? Linking investor return experiences, confidence, and investment beliefs

Arvid O.I. Hoffmann and Thomas Post

Journal of Behavioral and Experimental Finance, 2016, vol. 12, issue C, 65-78

Abstract: Confident investors trade more than less confident investors, but why? Prior research tests the ultimate relation between investor confidence and trading, but does not empirically examine the underlying mechanism that explains why confidence leads to trading. We complement the literature by developing a conceptual framework and presenting empirical evidence on a psychologically plausible mechanism through which confidence leads to trading. Using a combination of individual investors’ brokerage records and matching monthly survey data, we show that more confident investors rely more on intuitive judgments when forming beliefs about expected returns. In particular, they rely more on naïve reinforcement learning and extrapolate individual return experiences into the future more strongly. Given the same return experience, more confident investors change their beliefs more strongly, providing more reason to trade. Ultimately, confident investors have higher turnover, which hurts their performance.

Keywords: Belief formation; Individual investors; Investor confidence; Naïve reinforcement learning; Return experiences; Trading (search for similar items in EconPapers)
JEL-codes: D14 D81 D83 D84 G02 G11 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:12:y:2016:i:c:p:65-78

DOI: 10.1016/j.jbef.2016.09.003

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