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
There are 2 versions of this paper
On the Survival of Overconfident Traders in a Competitive Securities Market
On the Survival of Overconfident Traders in a Competitive Securities Market
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: Suggested Citation
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