Overconfident Investors, Predictable Returns, and Excessive Trading

Journal of Economic Perspectives, Volume 29, Number 4, Fall 2015

Columbia Business School Research Paper No. 16-15

37 Pages Posted: 25 Jan 2016

See all articles by Kent D. Daniel

Kent D. Daniel

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: October 20, 2015

Abstract

Individuals and asset managers trade aggressively, resulting in high volume in asset markets, even when such trading results in high risk and low net returns. Asset prices display patterns of predictability that are difficult to reconcile with rational expectations – based theories of price formation. This paper discusses how investor overconfidence can explain these and other stylized facts. We review the evidence from psychology and securities markets bearing upon overconfidence effects, and present a set of overconfidence-based models that are consistent with this evidence.

Keywords: asset pricing, efficient markets, anomalies, behavioral finance, overconfidence

JEL Classification: D14, G02, G11, G12

Suggested Citation

Daniel, Kent D. and Hirshleifer, David A., Overconfident Investors, Predictable Returns, and Excessive Trading (October 20, 2015). Journal of Economic Perspectives, Volume 29, Number 4, Fall 2015; Columbia Business School Research Paper No. 16-15. Available at SSRN: https://ssrn.com/abstract=2721140 or http://dx.doi.org/10.2139/ssrn.2721140

Kent D. Daniel (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
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212-854-4679 (Phone)
212-854-4679 (Fax)

HOME PAGE: http://kentdaniel.net/

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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