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Overconfidence and Trading Volume


Markus Glaser


Ludwig-Maximilians-Universität München - Faculty of Business Administration (Munich School of Management)

Martin Weber


University of Mannheim - Department of Banking and Finance

April 14, 2003

AFA 2004 San Diego Meetings

Abstract:     
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.

Number of Pages in PDF File: 55

Keywords: Overconfidence, Differences of Opinion, Trading Volume, Individual Investors, Investor Behavior, Correlation of Economic and Psychologic Variables, Combination of Experimental and Field Data

JEL Classification: D80, G10

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Date posted: December 4, 2003  

Suggested Citation

Glaser, Markus and Weber, Martin, Overconfidence and Trading Volume (April 14, 2003). AFA 2004 San Diego Meetings. Available at SSRN: http://ssrn.com/abstract=471925 or http://dx.doi.org/10.2139/ssrn.471925

Contact Information

Markus Glaser
Ludwig-Maximilians-Universität München - Faculty of Business Administration (Munich School of Management) ( email )
Schackstraße 4
Munich, 80539
Germany
Martin Weber (Contact Author)
University of Mannheim - Department of Banking and Finance ( email )
D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)
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