Does Good Luck Make People Overconfident? Evidence from a Natural Experiment in the Stock Market

49 Pages Posted: 29 Nov 2018 Last revised: 20 Mar 2021

See all articles by Huasheng Gao

Huasheng Gao

Fanhai International School of Finance, Fudan University

Donghui Shi

Shanghai Stock Exchange

Bin Zhao

Thammasat Business School

Multiple version iconThere are 2 versions of this paper

Date Written: November 15, 2019

Abstract

This paper examines the changes in investors’ trading behavior after winning an IPO allotment
in China—a purely luck-driven event. We find that these investors subsequently become
overconfident: They trade more frequently and lose more money relative to other investors. This
effect is stronger when investors are inexperienced and when investors’ pre-existing level
of overconfidence is low. We also show that investors exhibit a stronger gambling propensity
and hold more lottery-like stock after winning an IPO allotment. Our findings are not explained
by wealth effects or house money effects. Overall, our evidence indicates that the experience of
good luck makes people overconfident about their prospects.

Keywords: Good Luck; Turnover Rate; Trading; Overconfidence; IPO Subscription

JEL Classification: G02; G11

Suggested Citation

Gao, Huasheng and Shi, Donghui and Zhao, Bin, Does Good Luck Make People Overconfident? Evidence from a Natural Experiment in the Stock Market (November 15, 2019). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3287489 or http://dx.doi.org/10.2139/ssrn.3287489

Huasheng Gao

Fanhai International School of Finance, Fudan University ( email )

Beijing West District Baiyun Load 10th
Shanghai, 100045
China
2165642222 (Phone)
2165642222 (Fax)

Donghui Shi

Shanghai Stock Exchange ( email )

Shanghai 200120
China

Bin Zhao (Contact Author)

Thammasat Business School ( email )

2 Prachan Road
Pra Nakorn
Bangkok, Bangkok 10200
Thailand

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