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Price Dynamics and Trader Overconfidence

Author

Listed:
  • Ahrens, Steffen

    (TU Berlin)

  • Bosch-Rosa, Ciril

    (TU Berlin)

  • Roulund, Rasmus

    (Danmarks Nationalbank)

Abstract

Overconfidence is one of the most important biases in financial markets and commonly associated with excessive trading and asset market bubbles. So far, most of the finance literature takes overconfidence as a given, \"static\" personality trait. In this paper we introduce a novel experimental design which allows us to track different measures of overconfidence during an asset market bubble. The results show that overconfidence co-moves with asset prices and points towards a feedback loop in which overconfidence adds fuel to the flame of existing bubbles.

Suggested Citation

  • Ahrens, Steffen & Bosch-Rosa, Ciril & Roulund, Rasmus, 2019. "Price Dynamics and Trader Overconfidence," Rationality and Competition Discussion Paper Series 161, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:161
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    References listed on IDEAS

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    More about this item

    Keywords

    overconfidence; experiment; asset markets;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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