Advanced Search
MyIDEAS: Login to save this paper or follow this series

Overconfidence and Trading Volume

Contents:

Author Info

  • Glaser, Markus
  • Weber, Martin
Registered author(s):

    Abstract

    Theoretical models predict that overconfident investors will trade more than rational investors. We directly test this hypothesis by correlating individual overconfidence scores with several measures of trading volume of individual investors (number of trades, turnover). Approximately 3000 online broker investors were asked to answer an internet questionnaire which was designed to measure various facets of overconfidence (miscalibration, the better than average effect, illusion of control, unrealistic optimism). The measures of trading volume were calculated by the trades of 215 individual investors who answered the questionnaire. We find that investors who think that they are above average in terms of investment skills or past performance trade more. Measures of miscalibration are, contrary to theory, unrelated to measures of trading volume. This result is striking as theoretical models that incorporate overconfident investors mainly motivate this assumption by the calibration literature and model overconfidence as underestimation of the variance of signals. The results hold even when we control for several other determinants of trading volume in a cross-sectional regression analysis. In connection with other recent findings, we conclude that the usual way of motivating and modeling overconfidence - which is mainly based on the calibration literature - has to be treated with caution. We argue that our findings present a psychological foundation for the ‘differences of opinion’ explanation of high levels of trading volume. In addition, our way of empirically evaluating behavioural finance models - the correlation of economic and psychological variables and the combination of psychometric measures of judgment biases (such as overconfidence scores) and field data - seems to be a promising way to better understand which psychological phenomena drive economic behaviour.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.cepr.org/pubs/dps/DP3941.asp
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3941.

    as in new window
    Length:
    Date of creation: Jun 2003
    Date of revision:
    Handle: RePEc:cpr:ceprdp:3941

    Contact details of provider:
    Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
    Phone: 44 - 20 - 7183 8801
    Fax: 44 - 20 - 7183 8820

    Order Information:
    Email:

    Related research

    Keywords: combination of psychometric measures of judgement biases and field data; correlation of Economic and psychological variables; differences of opinion; individual investors; investor behaviour; overconfidence; trading volume;

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Simon Gervais & Terrance Odean, . "Learning To Be Overconfident," Rodney L. White Center for Financial Research Working Papers 5-97, Wharton School Rodney L. White Center for Financial Research.
    2. Bruno Biais & Denis Hilton & Karine Mazurier & Sébastien Pouget, 2000. "Psychological Traits and Trading Strategies," CSEF Working Papers 39, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    3. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
    4. Shiller, Robert J., 1999. "Human behavior and the efficiency of the financial system," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 20, pages 1305-1340 Elsevier.
    5. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
    6. Anderhub,Vital & Müller,Rudolf & Schmidt,Carsten, 2001. "Design and Evaluation of an Economic Experiment via the Internet," Research Memorandum 016, Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT).
    7. James Dow & Gary Gorton, 1994. "Noise Trading, Delegated Portfolio Management, and Economic Welfare," Center for Financial Institutions Working Papers 95-10, Wharton School Center for Financial Institutions, University of Pennsylvania.
    8. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, number 9780198296980, October.
    9. Spanos,Aris, 1986. "Statistical Foundations of Econometric Modelling," Cambridge Books, Cambridge University Press, number 9780521269124.
    10. Hirshleifer, David, 2001. "Investor Psychology and Asset Pricing," MPRA Paper 5300, University Library of Munich, Germany.
    11. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128 Elsevier.
    12. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
    13. Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2113-2141, October.
    14. Kandel, Eugene & Pearson, Neil D, 1995. "Differential Interpretation of Public Signals and Trade in Speculative Markets," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 831-72, August.
    15. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
    16. Shefrin, Hersh & Statman, Meir, 1985. " The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-90, July.
    17. Morris, Stephen, 1995. "The Common Prior Assumption in Economic Theory," Economics and Philosophy, Cambridge University Press, vol. 11(02), pages 227-253, October.
    18. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
    19. Paul Milgrom & Nancy L.Stokey, 1979. "Information, Trade, and Common Knowledge," Discussion Papers 377R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    20. Kirchler, Erich & Maciejovsky, Boris, 2002. " Simultaneous Over- and Underconfidence: Evidence from Experimental Asset Markets," Journal of Risk and Uncertainty, Springer, vol. 25(1), pages 65-85, July.
    21. John R. Graham & Campbell R. Harvey, 2001. "Expectations of Equity Risk Premia, Volatility and Asymmetry from a Corporate Finance Perspective," NBER Working Papers 8678, National Bureau of Economic Research, Inc.
    22. Werner F. M. De Bondt & Richard H. Thaler, 1994. "Financial Decision-Making in Markets and Firms: A Behavioral Perspective," NBER Working Papers 4777, National Bureau of Economic Research, Inc.
    23. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
    24. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
    25. Varian, Hal R, 1985. " Divergence of Opinion in Complete Markets: A Note," Journal of Finance, American Finance Association, vol. 40(1), pages 309-17, March.
    26. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
    27. Benos, Alexandros V., 1998. "Aggressiveness and survival of overconfident traders," Journal of Financial Markets, Elsevier, vol. 1(3-4), pages 353-383, September.
    28. Hvide, Hans K., 2002. "Pragmatic beliefs and overconfidence," Journal of Economic Behavior & Organization, Elsevier, vol. 48(1), pages 15-28, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Chandra, Abhijeet, 2008. "Decision Making in the Stock Market: Incorporating Psychology with Finance," MPRA Paper 21288, University Library of Munich, Germany, revised 01 Nov 2008.
    2. Bruno Biais & Denis Hilton & Karine Mazurier & Sébastien Pouget, 2005. "Judgemental Overconfidence, Self-Monitoring, and Trading Performance in an Experimental Financial Market," Review of Economic Studies, Oxford University Press, vol. 72(2), pages 287-312.
    3. Deaves, Richard & Lüders, Erik & Schröder, Michael, 2005. "The Dynamics of Overconfidence: Evidence from Stock Market Forecasters," ZEW Discussion Papers 05-83, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    4. Diego García & Francesco Sangiorgi & Branko Urošević, 2007. "Overconfidence and Market Efficiency with Heterogeneous Agents," Economic Theory, Springer, vol. 30(2), pages 313-336, February.
    5. Ko, K. Jeremy & (James) Huang, Zhijian, 2007. "Arrogance can be a virtue: Overconfidence, information acquisition, and market efficiency," Journal of Financial Economics, Elsevier, vol. 84(2), pages 529-560, May.
    6. Di Maggio, Marco, 2009. "Sweet Talk: A Theory of Persuasion," MPRA Paper 18697, University Library of Munich, Germany.
    7. Luís Santos-Pinto, 2006. "Positive Self-Image over Time," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 09.02, Université de Lausanne, Faculté des HEC, DEEP.
    8. Glaser, Markus, 2003. "Online Broker Investors: Demographic Information, Investment Strategy, Portfolio Positions, and Trading Activity," Sonderforschungsbereich 504 Publications 03-18, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    9. Glaser, Markus & Weber, Martin, 2005. "Overconfidence and Trading Volume," SIFR Research Report Series 40, Institute for Financial Research.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:3941. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.