Does Forecast Confidence Boost Trading? Exploring an Improved Forecast Certainty Measure

Abstract

While finance studies propose that forecast-confidence motivates trading, the experimental findings regarding the anticipated confidence-trading link are inconclusive and typically insignificant. Attempting to bridge the gap, we modify the standard interval forecasting task to measure the personal tendency for forecast-confidence directly. The modified task is utilized to test the confidence-trading correlations at the general, attitudinal level and in specific scenarios. The attitudinal test surprisingly reveals that forecast-confidence links with smaller inclination to churn stocks, although confidence in profitability boosts the willingness to buy particular stocks beyond the response to forecasts alone. The trait level correlation is brought by opposite personality and competence effects on confidence and trading.

Keywords: Forecast confidence, trading inclination, overprecision, personality

JEL Classification: C90, G11, G17