On the Survival of Overconfident Traders in a Competitive Securities Market

Journal of Financial Markets, Vol. 4, No. 1, pp. 73-84, January 2001

22 Pages Posted: 1 Dec 2008

See all articles by Guo Ying Luo

Guo Ying Luo

Rutgers, The State University of New Jersey - Management Science & Information Systems; McMaster University - Michael G. DeGroote School of Business

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

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Abstract

Recent research has proposed several ways in which overconfident traders can persist in competition with rational traders. This paper offers an additional reason: overconfident traders do better than purely rational traders at exploiting mispricing caused by liquidity or noise traders. We examine both the static profitability of overconfident versus rational trading strategies, and the dynamic evolution of a population of overconfident, rational and noise traders. Replication of overconfident and rational types is assumed to be increasing in the recent profitability of their strategies. The main result is that the long-run steady-state equilibrium always involves overconfident traders as a substantial positive fraction of the population.

Keywords: survivorship, natural selection, overconfident traders, noise traders

JEL Classification: G00, G14

Suggested Citation

Luo, Rosemary Guo Ying and Hirshleifer, David A., On the Survival of Overconfident Traders in a Competitive Securities Market. Journal of Financial Markets, Vol. 4, No. 1, pp. 73-84, January 2001. Available at SSRN: https://ssrn.com/abstract=1288931

Rosemary Guo Ying Luo

Rutgers, The State University of New Jersey - Management Science & Information Systems ( email )

180 University Ave.
Newark, NJ 07102-1895
United States
732-445-2996 (Phone)

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

David A. Hirshleifer (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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