Abstract

In this paper, we discuss the role of overconfidence as an explanation for these patterns. Overconfidence means having mistaken valuations and believing in them too strongly. It might seem that actors in liquid financial markets should not be very susceptible to overconfidence, because return outcomes are measurable, providing extensive feedback. However, overconfidence has been documented among experts and professionals, including those in the finance profession. For example, overconfidence is observed among corporate financial officers (Ben-David, Graham, and Harvey 2013) and among professional traders and investment bankers (Glaser, Langer, and Weber 2013). People tend to be overoptimistic about their life prospects (Weinstein 1980), and this optimism directly affects their financial decisions (Puri and Robinson 2007).

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Citation

Daniel, Kent, and David Hirshleifer. "Overconfident Investors, Predictable Returns, and Excessive Trading." Journal of Economic Perspectives 29, no. 4 (2015): 61-88.

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