Deception and Self-Deception in Capital Markets

Abstract

We argue that self-deception underlies various aspects of the behavior of investors and of prices in capital markets. We examine the implications of self-deception for investor overconfidence, and how firms and financial institutions can exploit the overconfidence of investors in a predatory fashion. These ideas link self-deception to deception by others. We also examine how investor self-deception and overconfidence can affect financial reporting and disclosure policy.