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On the Survival of Overconfident Traders in a Competitive Securities Market

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Author Info
Hirshleifer, David
Luo, Guo Ying

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Abstract

Recent research has proposed several ways in which overconfident traders can persist in competition with rational traders. This paper offers an additional reason: overconfident traders do better than purely rational traders at exploiting mispricing caused by liquidity or noise traders. We examine both the static profitability of overconfident versus rational trading strategies, and the dynamic evolution of a population of overconfident, rational and noise traders. Replication of overconfident and rational types is assumed to be increasing in the recent profitability of their strategies. The main result is that the long-run steady-state equilibrium always involves overconfident traders as a substantial positive fraction of the population.

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File URL: http://mpra.ub.uni-muenchen.de/15347/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15347.

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Date of creation: 2000
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Handle: RePEc:pra:mprapa:15347

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Related research
Keywords: Survivorship; Natural Selection; Overconfident Traders; Noise traders;

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Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G00 - Financial Economics - - General - - - General

References listed on IDEAS
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  1. Figlewski, Stephen, 1982. " Information Diversity and Market Behavior," Journal of Finance, American Finance Association, vol. 37(1), pages 87-102, March. [Downloadable!] (restricted)
  2. Palomino, Frederic, 1996. " Noise Trading in Small Markets," Journal of Finance, American Finance Association, vol. 51(4), pages 1537-50, September. [Downloadable!] (restricted)
  3. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
    Other versions:
  4. Luo, Guo Ying, 1998. "Market Efficiency and Natural Selection in a Commodity Futures Market," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(3), pages 647-74.
  5. De Long, J Bradford, et al, 1991. "The Survival of Noise Traders in Financial Markets," Journal of Business, University of Chicago Press, vol. 64(1), pages 1-19, January. [Downloadable!] (restricted)
    Other versions:
  6. Benos, Alexandros V., 1998. "Aggressiveness and survival of overconfident traders," Journal of Financial Markets, Elsevier, vol. 1(3-4), pages 353-383, September. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Richard Deaves & Erik Lüders & Michael Schröder, 2005. "The dynamics of overconfidence: Evidence from stock market forecasters," CoFE Discussion Paper 05-10, Center of Finance and Econometrics, University of Konstanz. [Downloadable!]
  2. HAMADI, Malika & RENGIFO, Erick & SALZMAN, Diego, 2005. "Illusionary finance and trading behavior," CORE Discussion Papers 2005004, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  3. Jasmina Hasanhodzic & Andrew W. Lo & Emanuele Viola, 2009. "A Computational View of Market Efficiency," Quantitative Finance Papers 0908.4580, arXiv.org. [Downloadable!]
  4. Frank Caliendo & Kevin X. D. Huang, 2007. "Overconfidence in financial markets and consumption over the life cycle," Working Papers 07-3, Federal Reserve Bank of Philadelphia. [Downloadable!]
  5. Nosic, Alen & Weber, Martin, 2007. "Determinants of Risk Taking Behavior: The role of Risk Attitudes, Risk Perceptions and Beliefs," Sonderforschungsbereich 504 Publications 07-56, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
  6. Dittrich, Dennis & Gueth, Werner & Maciejovsky, Boris, 2001. "Overconfidence in Investment Decisions: An Experimental Approach," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  7. Lux, Thomas, 2006. "Financial power laws : empirical evidence, models, and mechanism," Economics Working Papers 2006,12, Christian-Albrechts-University of Kiel, Department of Economics. [Downloadable!]
  8. David V. Budescu & Boris Maciejovsky, . "Reasoning and Institutions: Do Markets Facilitate Logical Reasoning in the Wason Selection Task?," Papers on Strategic Interaction 2003-04, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
  9. Diego García & Francesco Sangiorgi & Branko Urošević, 2007. "Overconfidence and Market Efficiency with Heterogeneous Agents," Economic Theory, Springer, vol. 30(2), pages 313-336, February. [Downloadable!] (restricted)
    Other versions:
  10. Malika, HAMADI & Erick, RENGIFO & Diego SALZMAN, 2004. "Illusionary Finance and Trading Behavior," Discussion Papers (ECON - Département des Sciences Economiques) 2005012, Université catholique de Louvain, Département des Sciences Economiques, revised 15 Jan 2005. [Downloadable!]
  11. Frank Caliendo & Kevin X.D. Huang, 2007. "Overconfidence and Consumption over the Life Cycle," Working Papers 0712, Department of Economics, Vanderbilt University. [Downloadable!]
  12. Antonio E. Bernardo & Ivo Welch, 2001. "On the Evolution of Overconfidence and Entrepreneurs," Cowles Foundation Discussion Papers 1307, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  13. Deaves, Richard & Lüders, Erick & 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. [Downloadable!]
  14. Glaser, Markus & Weber, Martin, 2005. "Overconfidence and Trading Volume," SIFR Research Report Series 40, Institute for Financial Research. [Downloadable!]
  15. Hirshleifer, David & Subrahmanyam, Avanidhar & Titman, Sheridan, 2004. "Feedback and the Success of Irrational Investors," Working Paper Series 2004-8, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
    Other versions:
  16. Markus Glaser & Martin Weber, 2007. "Overconfidence and trading volume," The Geneva Papers on Risk and Insurance Theory, Springer, vol. 32(1), pages 1-36, June. [Downloadable!] (restricted)
  17. Glaser, Markus & Nöth, Markus & Weber, Martin, 2003. "Behavioral Finance," Sonderforschungsbereich 504 Publications 03-14, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
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