Financial Overconfidence Over Time - Foresight, Hindsight, and Insight of Investors
University of Mannheim - Department of Banking and Finance
August 31, 2013
AFA 2013 San Diego Meetings Paper
EFA 2012 Copenhagen Meetings Paper
Overconfidence leads to increased trading activity, higher risk taking, and less diversification. In a panel survey of online brokerage clients, we ask for stock market and portfolio expectations and derive several overconfidence measures from the responses. Overconfidence is present in our sample in various forms. By matching survey data with investors' actual transactions and portfolio holdings, we find an influence of overplacement on trading activity, of overprecision and overestimation on degree of diversification, and of overprecision and overplacement on risk taking. We explore the evolution of overconfidence over time and identify a role of past success and hindsight on subsequent degree of overconfidence.
Number of Pages in PDF File: 47
Keywords: Overconfidence, Trading, Diversification, Risk Taking, Expectations, Hindsight
JEL Classification: G02, G11
Date posted: February 8, 2012 ; Last revised: September 2, 2013
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