Financial Overconfidence Over Time - Foresight, Hindsight, and Insight of Investors

Merkle, Christoph

Document Type: Conference presentation
Year of publication: 2013
Conference title: AFA 2013 San Diego Meetings
Location of the conference venue: San Diego, Calif.
Publication language: English
Institution: Business School > ABWL u. Finanzwirtschaft, insbes. Bankbetriebslehre (Weber -2017)
Subject: 330 Economics
Classification: JEL: G02 , G11,
Keywords (English): Overconfidence , Trading , Diversification , Risk Taking , Expectations , Hindsight
Abstract: Overconfidence is among the most popular psychological explanations for investing behavior of private households. It has been linked to portfolio turnover, diversification, and risk taking, with mostly negative consequences for investors. In a panel survey of self-directed investors, who own an online brokerage account at a UK bank, we ask for stock market and portfolio expectations and derive several overconfidence measures from the responses. We find that in general overconfidence is present in our sample. We then match the survey data with investors' actual transactions and portfolio holdings, and find an influence of overplacement on trading activity, of overprecision and overestimation on degree of diversification, and of overprecision and overplacement on risk taking. Overconfidence hereby leads to increased trading activity, higher risk taking, and less diversification. We explore the evolution of overconfidence over time and identify a role of past success and hindsight on subsequent degree of overconfidence.

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