Disposed to Be Overconfident

40 Pages Posted: 13 Apr 2023 Last revised: 10 May 2023

See all articles by Katrin Gödker

Katrin Gödker

Bocconi Univesity

Terrance Odean

University of California, Berkeley - Haas School of Business

Paul Smeets

University of Amsterdam

Multiple version iconThere are 2 versions of this paper

Date Written: March 30, 2023


We show that the disposition effect - the tendency of investors to hold losers and sell winners - can be a source of overconfidence. We find experimental evidence that individuals update beliefs about their own investment ability based on realized gains and losses rather than the overall performance of their portfolio. We also find supporting field evidence. Dutch retail investors who realized more gains than losses believe they have higher portfolio performance relative to other investors, even after controlling for their actual portfolio performance. We develop a formal model demonstrating how the disposition effect leads to overconfidence and examine model implications for investors' trading behavior and expected profit.

Keywords: Investor Beliefs, Disposition Effect, Overconfidence, Experimental Finance

JEL Classification: D01, G4

Suggested Citation

Gödker, Katrin and Odean, Terrance and Smeets, Paul, Disposed to Be Overconfident (March 30, 2023). Available at SSRN: https://ssrn.com/abstract=4404706 or http://dx.doi.org/10.2139/ssrn.4404706

Katrin Gödker (Contact Author)

Bocconi Univesity ( email )

Via Roentgen 1
Milano, MI 20136

Terrance Odean

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

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-6767 (Phone)
510-666-2561 (Fax)

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

Paul Smeets

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB

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