Does Good Luck Make People Overconfident? Evidence from a Natural Experiment in the Stock Market

This paper examines the changes in investors’ trading behavior after winning an IPO allotment
in China—a purely luck-driven event. We find that these investors subsequently become
overconfident: They trade more frequently and lose more money relative to other investors. This
effect is stronger when investors are inexperienced and when investors’ pre-existing level
of overconfidence is low. We also show that investors exhibit a stronger gambling propensity
and hold more lottery-like stock after winning an IPO allotment. Our findings are not explained
by wealth effects or house money effects. Overall, our evidence indicates that the experience of
good luck makes people overconfident about their prospects.

Keywords: Good Luck; Turnover Rate; Trading; Overconfidence; IPO Subscription

JEL Classification: G02; G11

Suggested Citation: Suggested Citation

Gao, Huasheng and Shi, Donghui and Zhao, Bin, Does Good Luck Make People Overconfident? Evidence from a Natural Experiment in the Stock Market (November 15, 2019). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3287489 or http://dx.doi.org/10.2139/ssrn.3287489