On the Survival of Overconfident Traders in a Competitive Securities Market

Dice Working Paper No. WP 99-9

Posted: 2 Mar 2000

See all articles by David A. Hirshleifer

David A. Hirshleifer

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

Guo Ying Luo

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

Multiple version iconThere are 2 versions of this paper

Date Written: June 14, 1999

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.

JEL Classification: G1

Suggested Citation

Hirshleifer, David A. and Luo, Rosemary Guo Ying, On the Survival of Overconfident Traders in a Competitive Securities Market (June 14, 1999). Dice Working Paper No. WP 99-9. Available at SSRN: https://ssrn.com/abstract=173229

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

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

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