Confirmation Bias, Overconfidence, and Investment Performance: Evidence from Stock Message Boards

59 Pages Posted: 14 Jul 2010 Last revised: 8 Oct 2010

JaeHong Park

University of Texas at Austin - Red McCombs School of Business

Prabhudev Konana

University of Texas at Austin - Department of Information, Risk and Operations Management

Bin Gu

Arizona State University (ASU) - Department of Information Systems

Alok Kumar

University of Miami - School of Business Administration

Rajagopal Raghunathan

University of Texas at Austin - Red McCombs School of Business

Date Written: July 12, 2010

Abstract

Using data from a new field experiment in South Korea, we study how information from virtual communities such as stock message boards influences investors’ trading decisions and investment performance. Motivated by recent studies in psychology, we conjecture that investors would use message boards to seek information that confirms their prior beliefs. This confirmation bias would make them more overconfident and adversely affect their investment performance. An analysis of 502 investor responses from the largest message board operator in South Korea supports our conjecture. We find that investors exhibit confirmation bias when they process information from message boards. We also demonstrate that investors with stronger confirmation bias exhibit greater overconfidence. Those investors have higher expectations about their performance, trade more frequently, but obtain lower realized returns. Collectively, these results suggest that participation in virtual communities increases investors’ propensity to commit investment mistakes and is likely to be detrimental to their investment performance.

Keywords: Confirmation Bias, Overconfidence, Investment Decisions, Korean Individual Investors, Virtual Communities, Stock Message Boards

JEL Classification: G11, G12

Suggested Citation

Park, JaeHong and Konana, Prabhudev and Gu, Bin and Kumar, Alok and Raghunathan, Rajagopal, Confirmation Bias, Overconfidence, and Investment Performance: Evidence from Stock Message Boards (July 12, 2010). McCombs Research Paper Series No. IROM-07-10. Available at SSRN: https://ssrn.com/abstract=1639470 or http://dx.doi.org/10.2139/ssrn.1639470

JaeHong Park

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

Prabhudev Konana

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States

Bin Gu

Arizona State University (ASU) - Department of Information Systems ( email )

Tempe, AZ
United States

Alok Kumar (Contact Author)

University of Miami - School of Business Administration ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

Rajagopal Raghunathan

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

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