Counting pennies, losing pounds: Biased learning about own trading ability

66 Pages Posted: 30 Nov 2023 Last revised: 9 Apr 2025

See all articles by Fernando Chague

Fernando Chague

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics

Bruno Giovannetti

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics

Bernardo Guimaraes

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics

Bernardo Maciel

University of California, Berkeley - Haas School of Business

Date Written: August 19, 2024

Abstract

We study the behavior of retail day traders to shed light on the causes of overconfidence in financial markets. We show these individuals assess their trading skills using a simple counting heuristic: the proportion of profitable days. This yields an upward-biased performance measure, as individuals exhibit a strong disposition effect that artificially inflates the proportion of profitable days. We develop and estimate a model showing that without the disposition effect, the counterfactual proportion of profitable days would be 47%, compared to the actual 52%. Our findings show that the disposition effect, combined with simple heuristics for evaluating performance, generates overconfidence.

Keywords: overconfidence, retail investors, counting heuristic, disposition effect

JEL Classification: G11, G40, G41

Suggested Citation

Chague, Fernando and Giovannetti, Bruno and Guimaraes, Bernardo and Maciel, Bernardo, Counting pennies, losing pounds: Biased learning about own trading ability (August 19, 2024). Available at SSRN: https://ssrn.com/abstract=4636623 or http://dx.doi.org/10.2139/ssrn.4636623

Fernando Chague

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics ( email )

Rua Itapeva 474
São Paulo, São Paulo 01332-000
Brazil

HOME PAGE: http://https://sites.google.com/site/fchague/

Bruno Giovannetti (Contact Author)

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics ( email )

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000
Brazil

Bernardo Guimaraes

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics ( email )

Rua Itapeva, 474
Sao Paulo
Brazil

Bernardo Maciel

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

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
602
Abstract Views
1,817
Rank
96,945
PlumX Metrics