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

AFA 2013 San Diego Meetings Paper

EFA 2012 Copenhagen Meetings Paper

47 Pages Posted: 8 Feb 2012 Last revised: 2 Sep 2013

Christoph Merkle

Kuehne Logistics University

Date Written: August 31, 2013

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 degree of 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 degree of overconfidence.

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 (August 31, 2013). AFA 2013 San Diego Meetings Paper; EFA 2012 Copenhagen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2001513 or http://dx.doi.org/10.2139/ssrn.2001513

Christoph Merkle (Contact Author)

Kuehne Logistics University ( email )

Gro├čer Grasbrook 17
Hamburg, 20457
Germany
+49(0)40-328707-234 (Phone)

HOME PAGE: http://www.the-klu.org

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