House Money and Overconfidence on the Trading Floor

38 Pages Posted: 27 Dec 2001

See all articles by Steven C. Mann

Steven C. Mann

Texas Christian University - M.J. Neeley School of Business

Peter Locke

Texas Christian University

Date Written: December 2001

Abstract

We examine the trading activity of a population of professional futures traders for evidence of the behavioral characteristics generally referred to as overconfidence and/or "gambling with the house money". The results are broadly consistent with the Gervais and Odean (2001) model of overconfidence and learning, which predicts that successful and inexperienced traders are the most likely to be overconfident. We find little evidence of overconfidence in the general trading population - a group of largely experienced traders. However, we find that the most successful traders are more likely to take risk when winning than the less successful traders - providing support for the notion that the successful are more likely to be overconfident. We also find that trader experience is related to a measure of overconfidence: traders with more experience are less likely to take more risk after a period of abnormally good profits than their less experienced counterparts.

Suggested Citation

Mann, Steven Carl and Locke, Peter R., House Money and Overconfidence on the Trading Floor (December 2001). AFA 2002 Atlanta Meetings. Available at SSRN: https://ssrn.com/abstract=295108 or http://dx.doi.org/10.2139/ssrn.295108

Steven Carl Mann (Contact Author)

Texas Christian University - M.J. Neeley School of Business ( email )

Campus Box 298530
Fort Worth, TX 76129
United States
817-257-7569 (Phone)
817-257-7227 (Fax)

Peter R. Locke

Texas Christian University ( email )

Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States
817-257-5048 (Phone)

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