Leveraging Overconfidence

56 Pages Posted: 7 Sep 2019 Last revised: 26 Dec 2019

See all articles by Brad M. Barber

Brad M. Barber

University of California, Davis

Xing Huang

Washington University in St. Louis - Olin Business School

K. Jeremy Ko

Securities and Exchange Commission

Terrance Odean

University of California, Berkeley - Haas School of Business

Date Written: December 18, 2019

Abstract

In theory, overconfident investors with a budget constraint use leverage more, trade more, and perform worse than well-calibrated investors. We confirm these predictions empirically by analyzing the overconfidence, trading, and performance of retail investors who use margin. Using survey data, we measure overconfidence as the difference between an investor’s self-assessment of knowledge and tested knowledge; margin investors have greater overconfidence than cash investors. Using broker data, we find margin investors trade more, speculate more, and have worse security selection ability than cash investors. A long-short portfolio that follows the trades of margin investors loses 35 bps per day.

Keywords: Individual Investors, Margin, Overconfidence, Stock Trading

JEL Classification: G41, G11, G12

Suggested Citation

Barber, Brad M. and Huang, Xing and Ko, Kwangmin and Odean, Terrance, Leveraging Overconfidence (December 18, 2019). Available at SSRN: https://ssrn.com/abstract=3445660 or http://dx.doi.org/10.2139/ssrn.3445660

Brad M. Barber (Contact Author)

University of California, Davis ( email )

Graduate School of Management
One Shields Avenue
Davis, CA 95616
United States
530-752-0512 (Phone)
530-752-2924 (Fax)

Xing Huang

Washington University in St. Louis - Olin Business School ( email )

Simon Hall 211
Washington University in St. Louis
St. Louis, MO 63130
United States

Kwangmin Ko

Securities and Exchange Commission ( email )

United States Securities and Exchange Commission
100 F St NE
Washington, DC 20549
United States
202-551-7895 (Phone)

Terrance Odean

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
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Berkeley, CA 94720
United States
510-642-6767 (Phone)
510-666-2561 (Fax)

HOME PAGE: http://www.haas.berkeley.edu/faculty/odean.html

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