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Overconfidence and Trading Volume

  • Glaser, Markus

    ()

    (University of Mannheim)

  • Weber, Martin

    ()

    (University of Mannheim)

Theoretical models predict that overconfident investors will trade more than rational investors. We directly test this hypothesis by correlating individual overconfidence scores with several measures of trading volume of individual investors (number of trades, turnover). Approximately 3,000 online broker investors were asked to answer an internet questionnaire which was designed to measure various facets of overconfidence (miscalibration, volatility estimates, better than average effect). The measures of trading volume were calculated by the trades of 215 individual investors who answered the questionnaire. We find that investors who think that they are above average in terms of investment skills or past performance (but who did not have above average performance in the past) trade more. Measures of miscalibration are, contrary to theory, unrelated to measures of trading volume. This result is striking as theoretical models that incorporate overconfident investors mainly motivate this assumption by the calibration literature and model overconfidence as underestimation of the variance of signals. In connection with other recent findings, we conclude that the usual way of motivating and modeling overconfidence which is mainly based on the calibration literature has to be treated with caution. Moreover, our way of empirically evaluating behavioral finance models - the correlation of economic and psychological variables and the combination of psychometric measures of judgment biases (such as overconfidence scores) and field data - seems to be a promising way to better understand which psychological phenomena actually drive economic behavior.

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Paper provided by Institute for Financial Research in its series SIFR Research Report Series with number 40.

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Length: 48 pages
Date of creation: 15 Dec 2005
Date of revision:
Publication status: Published in Geneva Risk and Insurance Review, 2007, pages 48.
Handle: RePEc:hhs:sifrwp:0040
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