How Does Investor Confidence Lead to Trading? Linking Investor Return Experiences, Confidence, and Investment Beliefs

55 Pages Posted: 30 Sep 2013 Last revised: 23 Feb 2016

See all articles by Arvid O. I. Hoffmann

Arvid O. I. Hoffmann

University of Adelaide - Business School; Network for Studies on Pensions, Aging and Retirement (Netspar)

Thomas Post

Maastricht University - School of Business and Economics - Department of Finance; Netspar

Date Written: February 2, 2016

Abstract

Confident investors trade more than less confident investors, but why? Prior research tests the ultimate relation between investor confidence and trading, but does not empirically examine the underlying mechanism that explains why confidence leads to trading. We complement the literature by developing a theoretical framework and presenting empirical evidence on a psychologically plausible mechanism through which confidence leads to trading. Using a combination of individual investors’ brokerage records and matching monthly survey data, we show that more confident investors rely more on intuitive judgments when forming beliefs about expected returns. In particular, they rely more on naïve reinforcement learning and extrapolate individual return experiences into the future more strongly. Given the same return experience, more confident investors change their beliefs more strongly, providing more reason to trade. Ultimately, confident investors have higher turnover, which hurts their performance.

Keywords: Belief Formation, Investor Confidence, Naïve Reinforcement Learning, Return Experiences, Trading

JEL Classification: D14, D81, D83, D84, G02, G11

Suggested Citation

Hoffmann, Arvid O. I. and Post, Thomas, How Does Investor Confidence Lead to Trading? Linking Investor Return Experiences, Confidence, and Investment Beliefs (February 2, 2016). 29th Australasian Finance and Banking Conference 2016. Available at SSRN: https://ssrn.com/abstract=2333419 or http://dx.doi.org/10.2139/ssrn.2333419

Arvid O. I. Hoffmann (Contact Author)

University of Adelaide - Business School ( email )

10 Pulteney Street
Adelaide, South Australia 5005
Australia

Network for Studies on Pensions, Aging and Retirement (Netspar)

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Thomas Post

Maastricht University - School of Business and Economics - Department of Finance ( email )

Tongersestraat 53
Maastricht, 6200 MD
Netherlands
+31 43 38 83899 (Phone)
+31 43 38 84875 (Fax)

HOME PAGE: http://www.thomas-post.com

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://www.netspar.nl

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