Overconfidence, Position Size, and the Link to Performance

48 Pages Posted: 28 Oct 2016 Last revised: 11 Apr 2019

See all articles by John Forman

John Forman

Charleston Academy

Joanne Horton

University of Warwick - Warwick Business School

Date Written: April 10, 2019

Abstract

The overconfidence literature employs activity metrics such as account turnover and trade frequency to link misattribution/self-attribution to excess trading. In this paper we argue relative position size is a more meaningful indicator of overconfidence. Using a sample of retail traders, we find that when traders take relatively larger positions they make more impaired trade entry/exit timing decisions. The opposite is seen when they trade more frequently. We also observe that more sophisticated and experienced traders trade relatively smaller positions and exhibit less overconfidence, consistent with these individuals suffering fewer behavioral biases, for which a likely learning effect is observed.

Keywords: overconfidence, retail trading, self-attribution, forex trading

JEL Classification: G41, G11, G32

Suggested Citation

Forman, John and Horton, Joanne, Overconfidence, Position Size, and the Link to Performance (April 10, 2019). Available at SSRN: https://ssrn.com/abstract=2860103 or http://dx.doi.org/10.2139/ssrn.2860103

John Forman (Contact Author)

Charleston Academy ( email )

SC
United States

Joanne Horton

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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