Financial Overconfidence Over Time: Foresight, Hindsight, and Insight of Investors

59 Pages Posted: 8 Feb 2012 Last revised: 8 Dec 2017

Date Written: November 10, 2016

Abstract

Overconfidence leads to increased trading activity, higher risk taking, and less diversification. In a panel survey of online brokerage clients, we ask for stock market and portfolio expectations and derive several overconfidence measures from the responses. Overconfidence is present in our sample in various forms. By matching survey data with investors' actual transactions and portfolio holdings, we find an influence of overplacement on trading activity, of overprecision and overestimation on diversification, and of overprecision and overplacement on risk taking. We explore the evolution of overconfidence over time and identify a role of past success and hindsight on subsequent overconfidence in line with learning to be overconfident.

Keywords: Overconfidence, Trading, Diversification, Risk Taking, Expectations, Hindsight

JEL Classification: G02, G11

Suggested Citation

Merkle, Christoph, Financial Overconfidence Over Time: Foresight, Hindsight, and Insight of Investors (November 10, 2016). Journal of Banking and Finance, 2017, Vol. 84, pp. 68-87. Preprint Version; AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2001513 or http://dx.doi.org/10.2139/ssrn.2001513

Christoph Merkle (Contact Author)

Aarhus University ( email )

Nordre Ringgade 1
DK-8000 Aarhus C, 8000
Denmark

HOME PAGE: http://christophmerkle.github.io/

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