56 Pages Posted: 7 Sep 2019 Last revised: 26 Dec 2019
Date Written: December 18, 2019
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: Suggested Citation