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Overconfidence and (Over)Trading: The Effect of Feedback on Trading Behavior

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  • Bregu, Klajdi

Abstract

Overconfidence is linked to higher levels of trading and lower profits in financial markets. This paper explores overconfidence and trading in a laboratory setting to determine whether overconfidence in the accuracy of one's information is a driver of this situation. In a laboratory experiment, I design an environment such that being overconfident in one's own accuracy of information creates incentives to overtrade. Across treatments, I exogenously vary the type of feedback participants receive, such that some groups receive no feedback and other groups receive varying feedback about the accuracy of information, limiting the likelihood that they remain overconfident. The results show that the accuracy of information mediates the overconfidence effects on trading, and indicate that overconfidence leads to higher trading volume and weakly damages profits.

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  • Bregu, Klajdi, 2020. "Overconfidence and (Over)Trading: The Effect of Feedback on Trading Behavior," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 88(C).
    • Handle: RePEc:eee:soceco:v:88:y:2020:i:c:s2214804319304768
    DOI: 10.1016/j.socec.2020.101598
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    References listed on IDEAS

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    Cited by:

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    3. Jitender Kumar & Neha Prince, 2022. "Overconfidence bias in the Indian stock market in diverse market situations: an empirical study," International Journal of System Assurance Engineering and Management, Springer;The Society for Reliability, Engineering Quality and Operations Management (SREQOM),India, and Division of Operation and Maintenance, Lulea University of Technology, Sweden, vol. 13(6), pages 3031-3047, December.
    4. Francesco Angelini & Massimiliano Castellani & Lorenzo Zirulia, 2022. "Overconfidence in the art market: a bargaining pricing model with asymmetric disinformation," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 39(3), pages 961-988, October.
    5. Jiayu Huang & Yifan Wang & Yaojun Fan & Hexuan Li, 2022. "Gauging the effect of investor overconfidence on trading volume from the perspective of the relationship between lagged stock returns and current trading volume," International Finance, Wiley Blackwell, vol. 25(1), pages 103-123, April.

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    More about this item

    Keywords

    Overconfidence; Trading volume; Trading profits;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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