System 1, System 2, and Speculative Trading

53 Pages Posted: 6 Jun 2018 Last revised: 13 Feb 2019

See all articles by M. Martin Boyer

M. Martin Boyer

HEC Montreal - Department of Finance

Samuel Ouzan

Neoma Business School

Date Written: January 30, 2019


Loss aversion and overconfidence are arguably the two most studied behavioral biases in finance, and yet often considered having contradictory effects on risk taking. Overconfident investors are generally more prone to take-on risk, whereas loss averse investors tend to be more cautious. We study their marginal impacts on trading. We propose a model in which rational investors and investors who are jointly loss averse and overconfident, disagree over public signals. The proposed theory succeeds to rationalize asymmetries in returns: It generates a positive correlation between volume and aggregate information, a high-volume return premium, positive unconditional skewness and explains cross-sectional variation in skewness at the firm level.

Keywords: Disagreement, Loss Aversion, Overconfidence, Skewness, Trading Volume

JEL Classification: G02, G12

Suggested Citation

Boyer, M. Martin and Ouzan, Samuel, System 1, System 2, and Speculative Trading (January 30, 2019). Paris December 2018 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: or

M. Martin Boyer

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7

Samuel Ouzan (Contact Author)

Neoma Business School ( email )

1 Rue du Maréchal Juin
Mont Saint Aignan Cedex, 76825

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