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Financial overconfidence over time: Foresight, hindsight, and insight of investors

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  • Merkle, Christoph

Abstract

Financial overconfidence leads to increased trading activity, higher risk taking, and less diversification. In a panel survey of online brokerage clients in the UK, we ask for stock market and portfolio expectations and derive several overconfidence measures from the responses. Overconfidence is identified in the sample in various forms. By matching survey data with participants’ transactions and portfolio holdings, we find an influence of overplacement on trading activity, of overprecision and overestimation on diversification, and of overprecision and overplacement on risk taking. We explore the evolution of overconfidence over time and identify a role of past success and hindsight on subsequent investor overconfidence in line with learning to be overconfident.

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  • Merkle, Christoph, 2017. "Financial overconfidence over time: Foresight, hindsight, and insight of investors," Journal of Banking & Finance, Elsevier, vol. 84(C), pages 68-87.
    • Handle: RePEc:eee:jbfina:v:84:y:2017:i:c:p:68-87
    DOI: 10.1016/j.jbankfin.2017.07.009
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    More about this item

    Keywords

    Overconfidence; Trading; Diversification; Risk taking; Expectations;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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