Does Sign Matter More than Size? An Investigation into the Source of Investor Overconfidence

60 Pages Posted: 13 Aug 2010

See all articles by Sankar De

Sankar De

Independent

Naveen R. Gondhi

Indian School of Business (ISB), Hyderabad

Bhimasankaram Pochiraju

Indian School of Business (ISB), Hyderabad

Multiple version iconThere are 2 versions of this paper

Date Written: August 12, 2010

Abstract

Using a unique and large dataset, the present paper contributes new insights to the growing literature on behavioral biases in portfolio decisions of individual investors. We find that the sign of the outcomes of recent past stock trades, where a positive sign indicates a profitable trade and a negative sign an unprofitable trade, influences the current trading decisions of investors strongly. Further, the influence of the sign of past trades is significantly stronger than the size of the gains or losses from the same trades. Moreover, the influence of sign increases relative to that of size as the size of past profits or losses increases. We also find that, on an average, trading under the influence of the sign of past trades consistently results in decline in profits for the investors. Our findings are consistent with a behavioral explanation suggested by recent research in experimental psychology that the investors are more sensitive to the affective intensity of a stimulus than to its magnitude. The effects of the behavioral pattern in question are economically large as well as statistically significant.

We introduce several methodological innovations in this paper.

Keywords: Individual Investors, Institutional Investors, Trading Behavior, Overconfidence

JEL Classification: D19, G14

Suggested Citation

De, Sankar and Gondhi, Naveen R. and Pochiraju, Bhimasankaram, Does Sign Matter More than Size? An Investigation into the Source of Investor Overconfidence (August 12, 2010). Available at SSRN: https://ssrn.com/abstract=1657926 or http://dx.doi.org/10.2139/ssrn.1657926

Sankar De (Contact Author)

Independent ( email )

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Naveen R. Gondhi

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Bhimasankaram Pochiraju

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

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