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Stock market experience and investor overconfidence: Do investors learn to be overconfident?

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  • Bernile, Gennaro
  • Bonaparte, Yosef
  • Delikouras, Stefanos

Abstract

Investor overconfidence, characterized by an excessive belief in the ability to generate superior portfolio returns, is a widely studied behavioral bias. This paper investigates the mechanisms underlying overconfidence using a Bayesian model that incorporates two features: biased prior beliefs, which imply overconfidence even before investors engage in the stock market, and biased learning, where investors overemphasize instances of outperforming the market. Empirical analysis supports the hypothesis that biased learning contributes to overconfidence, but only in the early years of investor tenure. Although overconfidence decreases with investment experience, we find that it is a widespread and persistent behavioral trait.

Suggested Citation

  • Bernile, Gennaro & Bonaparte, Yosef & Delikouras, Stefanos, 2025. "Stock market experience and investor overconfidence: Do investors learn to be overconfident?," Journal of Banking & Finance, Elsevier, vol. 174(C).
    • Handle: RePEc:eee:jbfina:v:174:y:2025:i:c:s0378426625000512
    DOI: 10.1016/j.jbankfin.2025.107431
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    Keywords

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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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