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The dynamics of overconfidence: Evidence from stock market forecasters

  • Richard Deaves

    ()

    (McMaster University)

  • Erik Lüders

    ()

    (Pinehill Capital and Laval University)

  • Michael Schröder

    (Center for European Economic Research (ZEW))

As a group, market forecasters are egregiously overconfident. In conformity to the dynamic model of overconfidence of Gervais and Odean (2001), successful forecasters become more overconfident. What’s more, more experienced forecasters have “learned to be overconfident,” and hence are more susceptible to this behavioral flaw than their less experienced peers. It is not just individuals who are affected. Markets also become more overconfident when market returns have been high.

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File URL: http://cofe.uni-konstanz.de/Papers/dp05_10.pdf
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Paper provided by Center of Finance and Econometrics, University of Konstanz in its series CoFE Discussion Paper with number 05-10.

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Length: 33 pages
Date of creation: 07 Oct 2005
Date of revision:
Handle: RePEc:knz:cofedp:0510
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  1. Glaser, Markus & Weber, Martin, 2003. "Overconfidence and Trading Volume," CEPR Discussion Papers 3941, C.E.P.R. Discussion Papers.
  2. Richard Deaves & Erik Lüders & Guo Ying Luo, 2005. "An Experimental Test of the Impact of Overconfidence and Gender on Trading Activity," CoFE Discussion Paper 05-07, Center of Finance and Econometrics, University of Konstanz.
  3. Simon Gervais & Terrance Odean, . "Learning To Be Overconfident," Rodney L. White Center for Financial Research Working Papers 5-97, Wharton School Rodney L. White Center for Financial Research.
  4. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis.
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  8. Terrance Odean, 1998. "Volume, Volatility, Price, and Profit When All Traders Are Above Average," Journal of Finance, American Finance Association, vol. 53(6), pages 1887-1934, December.
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  15. Glaser, Markus & Weber, Martin, 2005. "Which Past Returns Affect Trading Volume?," Sonderforschungsbereich 504 Publications 05-33, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  16. Kent D. Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 2000. "Covariance Risk, Mispricing, and the Cross Section of Security Returns," NBER Working Papers 7615, National Bureau of Economic Research, Inc.
  17. Hirshleifer, David & Luo, Guo Ying, 2000. "On the Survival of Overconfident Traders in a Competitive Securities Market," MPRA Paper 15347, University Library of Munich, Germany.
  18. Forsythe, Robert & Forrest Nelson & George R. Neumann & Jack Wright, 1992. "Anatomy of an Experimental Political Stock Market," American Economic Review, American Economic Association, vol. 82(5), pages 1142-61, December.
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  21. Terrance Odean, 1998. "Volume, Volatility, Price and Profit When All Traders Are Above Average," Finance 9803001, EconWPA.
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