Don't Confuse Brains with a Bull Market: Attribution Bias, Overconfidence, and Trading Behavior of Individual Investors*
EFA 2010 Frankfurt Meetings Paper
46 Pages Posted: 4 Jan 2012 Last revised: 4 Sep 2013
Date Written: August 12, 2013
Abstract
This paper tests the theory that attribution bias-inflated confidence in one's own skillcreates overconfident traders. Using the trading records of Chinese individual investors in different market conditions, we find that attribution bias resulting from a rising market increases investors' degree of overconfidence, as indicated by a greater extent of excessive trading, higher portfolio turnover, and poorer performance. The results are consistent with the argument that investors incorrectly attribute trading successes (luck) in a bull market to their own abilities, leading to increased overconfidence. Furthermore, these findings cannot be explained by alternative explanations such as the disposition effect and the tendency to gamble.
Keywords: Attribution bias, overconfidence, individual trading behavior, bull market, and bear market JEL Classification: G02, G11, G12
JEL Classification: G02, G11, G12
Suggested Citation: Suggested Citation
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