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Learning to be overconfident
Authors:Gervais  S; Odean  T
Institution:Finance Department, Wharton School, University of Pennsylvania, Steinberg Hall-Dietrich Hall, Suite 2300, Philadelphia, PA 19104-6367, USA
1 University of California, Davis, CA, USA
z Corresponding author
Abstract:We develop a multiperiod market model describing both the processby which traders learn about their ability and how a bias inthis learning can create overconfident traders. A trader inour model initially does not know his own ability. He infersthis ability from his successes and failures. In assessing hisability the trader takes too much credit for his successes.This leads him to become overconfident. A trader's expectedlevel of overconfidence increases in the early stages of hiscareer. Then, with more experience, he comes to better recognizehis own ability. The patterns in trading volume, expected profits,price volatility, and expected prices resulting from this endogenousoverconfidence are analyzed.
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