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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

Zhen Shi

Georgia State University

Na Wang

Hofstra University - Frank G. Zarb School of Business

Date Written: August 12, 2013

Abstract

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

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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