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Overconfidence and endogenous information acquisition

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  • Tian Liang

Abstract

Purpose - The purpose of this paper is to examine the implications of overconfidence for information acquisition and market efficiency. Design/methodology/approach - The paper studies a model of a competitive market with both overconfident and rational traders endogenously acquiring costly differential information. Findings - The paper shows that overconfident traders acquire more information than do rational traders, and improve market informational efficiency by making price more informative than in a fully rational market. Originality/value - This result is in contrast with Odean where information acquisition is exogenous, and overconfidence worsens price quality. Therefore, it may be crucial to incorporate endogenous information acquisition into models of overconfidence.

Suggested Citation

  • Tian Liang, 2013. "Overconfidence and endogenous information acquisition," China Finance Review International, Emerald Group Publishing Limited, vol. 3(1), pages 5-25, January.
    • Handle: RePEc:eme:cfripp:v:3:y:2013:i:1:p:5-25
    DOI: 10.1108/20441391311290758
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    Cited by:

    1. Ding, Jing & Fang, Libing & Chen, Shi, 2020. "Mitigating free riding in social networks: The impact of underestimating others’ ability in financial market," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 582-599.

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