Overconfident investors, predictable returns, and excessive trading

Hirshleifer, David and Daniel, Kent (2015): Overconfident investors, predictable returns, and excessive trading. Published in: Journal of Economic Perspectives , Vol. 29, No. 4 (2015): pp. 61-88.

Abstract

Individuals and asset managers trade aggressively, resulting in high volume in asset markets, even when such trading results in high risk and low net returns. Asset prices display patterns of predictability that are difficult to reconcile with rational expectations–based theories of price formation. This paper discusses how investor overconfidence can explain these and other stylized facts. We review the evidence from psychology and securities markets bearing upon overconfidence effects, and present a set of overconfidence-based models that are consistent with this evidence.

• Item Type: MPRA Paper
• Language: English
• Keywords: investor overconfidence, aggressive trading, return predictability, trading volume, return momentum, return reversal
• Subjects: D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles; D - Microeconomics > D1 - Household Behavior and Family Economics; D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Household Saving; Personal Finance; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations; G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading

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