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

See all articles by Zhen Shi

Zhen Shi

Georgia State University

Na Wang

Hofstra University - Frank G. Zarb School of Business

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

Shi, Zhen and Wang, Na, Don't Confuse Brains with a Bull Market: Attribution Bias, Overconfidence, and Trading Behavior of Individual Investors* (August 12, 2013). EFA 2010 Frankfurt Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1979208 or http://dx.doi.org/10.2139/ssrn.1979208

Zhen Shi (Contact Author)

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

Na Wang

Hofstra University - Frank G. Zarb School of Business ( email )

134 Hofstra University
Hempstead, NY 11549
United States

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