Overconfidence and Trading Volume
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 3000 online broker investors were asked to answer an internet questionnaire which was designed to measure various facets of overconfidence (miscalibration, the better than average effect, illusion of control, unrealistic optimism). 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 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. The results hold even when we control for several other determinants of trading volume in a cross-sectional regression analysis. In connection with other recent findings, we conclude that the usual way of motivating and modelling overconfidence which is mainly based on the calibration literature has to be treated with caution. We argue that our findings present a psychological foundation for the ``differences of opinion'' explanation of high levels of trading volume. In addition, 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 drive economic behavior.
|Date of creation:||29 Apr 2003|
|Date of revision:|
|Note:||Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.|
|Contact details of provider:|| Postal: |
Phone: (49) (0) 621-292-2547
Fax: (49) (0) 621-292-5594
Web page: http://www.sfb504.uni-mannheim.de/Email:
More information through EDIRC
Web page: http://www.sfb504.uni-mannheim.de
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bruno Biais & Denis Hilton & Karine Mazurier & Sébastien Pouget, 2000.
"Psychological Traits and Trading Strategies,"
CSEF Working Papers
39, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
- Caballe, Jordi & Sakovics, Jozsef, 2003.
"Speculating against an overconfident market,"
Journal of Financial Markets,
Elsevier, vol. 6(2), pages 199-225, April.
- Hvide, Hans K., 2002. "Pragmatic beliefs and overconfidence," Journal of Economic Behavior & Organization, Elsevier, vol. 48(1), pages 15-28, May.
- Anderhub, Vital & Muller, Rudolf & Schmidt, Carsten, 2001.
"Design and evaluation of an economic experiment via the Internet,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 46(2), pages 227-247, October.
- V. Anderhub & R. Müller & C. Schmidt, 1998. "Design and Evaluation of an Economic Experiment via the Internet," SFB 373 Discussion Papers 1998,69, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- Anderhub,Vital & Mï¿½ller,Rudolf & Schmidt,Carsten, 2001. "Design and Evaluation of an Economic Experiment via the Internet," Research Memorandum 016, Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT).
- Simon Gervais & Terrance Odean, .
"Learning To Be Overconfident,"
Rodney L. White Center for Financial Research Working Papers
05-97, Wharton School Rodney L. White Center for Financial Research.
- 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.
- Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, March.
- Harrison Hong & Jeremy C. Stein, 2003. "Differences of Opinion, Short-Sales Constraints, and Market Crashes," Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 487-525.
- Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, number 9780198296980, March.
- John R. Graham & Campbell R. Harvey, 2001. "Expectations of Equity Risk Premia, Volatility and Asymmetry from a Corporate Finance Perspective," NBER Working Papers 8678, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:xrs:sfbmaa:03-07. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Carsten Schmidt)The email address of this maintainer does not seem to be valid anymore. Please ask Carsten Schmidt to update the entry or send us the correct address
If references are entirely missing, you can add them using this form.