Overconfident Investors, Predictable Returns, and Excessive Trading

38 Pages Posted: 1 Feb 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

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Date Written: January 2016

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.

Suggested Citation

Daniel, Kent D. and Hirshleifer, David A., Overconfident Investors, Predictable Returns, and Excessive Trading (January 2016). NBER Working Paper No. w21945. Available at SSRN: https://ssrn.com/abstract=2725720

Kent D. Daniel (Contact Author)

Columbia Business School - Finance and Economics ( email )

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HOME PAGE: http://kentdaniel.net/

National Bureau of Economic Research (NBER)

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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 )

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United States

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