Don’t Confuse Brains with a Bull Market: Attribution Bias, Overconfidence, and Trading Behavior of Individual Investors
EFA 2010 Frankfurt Meetings Paper
47 Pages Posted: 4 Jan 2012 Last revised: 4 Sep 2013
Date Written: August 12, 2013
By comparing the trading behavior of individual investors in different market conditions, this paper tests the theory that attribution bias - inflated confidence in one’s own skill - creates overconfident traders. In a bull market, investors incorrectly attribute trading successes (luck) to their own abilities and therefore should be more overconfident than they are in a normal or a bear market. Consistent with this argument, we find that in a bull market investors exhibit more overconfidence indicated by the extent of excessive trading. This finding cannot be explained by alternative explanations such as disposition effect and the tendency to gamble.
Keywords: Attribution bias, overconfidence, individual trading behavior, bull market, and bear market
JEL Classification: G02, G11, G12
Suggested Citation: Suggested Citation