Overconfident Investors, Predictable Returns, and Excessive Trading
AbstractThe last several decades have witnessed a shift away from a fully rational paradigm of financial markets toward one in which investor behavior is influenced by psychological biases. Two principal factors have contributed to this evolution: a body of evidence showing how psychological bias affects the behavior of economic actors; and an accumulation of evidence that is hard to reconcile with fully rational models of security market trading volumes and returns. In particular, asset markets exhibit trading volumes that are high, with individuals and asset managers trading aggressively, even when such trading results in high risk and low net returns. Moreover, asset prices display patterns of predictability that are difficult to reconcile with rational expectations-based theories of price formation. In this paper, we discuss the role of overconfidence as an explanation for these patterns.
CitationDaniel, Kent, and David Hirshleifer. 2015. "Overconfident Investors, Predictable Returns, and Excessive Trading." Journal of Economic Perspectives, 29 (4): 61-88. DOI: 10.1257/jep.29.4.61
- D14 Household Saving; Personal Finance
- G02 Behavioral Finance: Underlying Principles
- G11 Portfolio Choice; Investment Decisions
- G12 Asset Pricing; Trading Volume; Bond Interest Rates