Disposed to Be Overconfident

Katrin Gödker, Terrance Odean and Paul Smeets

No 10357, CESifo Working Paper Series from CESifo

Abstract: We show that the disposition effect–the tendency of investors to hold losers and sell winners–can be a source of overconfidence. We find experimental evidence that individuals update beliefs about their own investment ability based on realized gains and losses rather than the overall performance of their portfolio. We also find supporting field evidence. Dutch retail investors who realized more gains than losses believe they have higher portfolio performance relative to other investors, even after controlling for their actual portfolio performance. We develop a formal model demonstrating how the disposition effect leads to overconfidence and examine model implications for investors’ trading behavior and expected profit.

Keywords: investor beliefs; disposition effect; overconfidence; experimental finance (search for similar items in EconPapers)
JEL-codes: D01 G40 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-exp and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10357

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