Financial overconfidence over time: Foresight,hindsight, and insight of investors |
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| Institution: | 1. School of Economics and Finance, Victoria University of Wellington, PO Box 600, Wellington 6140, New Zealand;2. Institute for the Study of Labour (IZA), Schaumburg-Lippe-Strasse 5-9, 53113 Bonn, Germany;3. Swedish Institute for Social Research (SOFI), Stockholm University, Universitetsvägen 10 F, 106 91 Stockholm, Sweden;4. Center for Corporate Performance (CCP), Copenhagen Business School, Porcelænshaven 24, 2000 Frederiksberg, Denmark;5. Research Centre for Education and the Labour Market (ROA), Maastricht University, P.O. Box 616, 6200 MD Maastricht, The Netherlands |
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| Abstract: | Financial overconfidence leads to increased trading activity, higher risk taking, and less diversification. In a panel survey of online brokerage clients in the UK, we ask for stock market and portfolio expectations and derive several overconfidence measures from the responses. Overconfidence is identified in the sample in various forms. By matching survey data with participants’ transactions and portfolio holdings, we find an influence of overplacement on trading activity, of overprecision and overestimation on diversification, and of overprecision and overplacement on risk taking. We explore the evolution of overconfidence over time and identify a role of past success and hindsight on subsequent investor overconfidence in line with learning to be overconfident. |
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