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Can an overconfident insider coexist with a representativeness heuristic insider?

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  • Liu, Hong
  • Du, Sarina

Abstract

This paper develops an insider trading model that incorporates the presence of rational, overconfident, and representativeness heuristic insiders. We find that the heuristic insider and overconfident insider trade more aggressively on their information than the rational insider, and that therefore, a higher probability exists for them to earn more profits. Furthermore, both higher heuristic bias of the heuristic insider and greater overconfidence of the overconfident insider lead to less expected profit for the rational insider and less expected loss for the noise trader. Moreover, in an equilibrium, both higher heuristic bias and greater overconfidence of an insider lead to a more efficient and stable market.

Suggested Citation

  • Liu, Hong & Du, Sarina, 2016. "Can an overconfident insider coexist with a representativeness heuristic insider?," Economic Modelling, Elsevier, vol. 54(C), pages 170-177.
    • Handle: RePEc:eee:ecmode:v:54:y:2016:i:c:p:170-177
    DOI: 10.1016/j.econmod.2015.12.032
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    References listed on IDEAS

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    Cited by:

    1. Liu, Hong & Qi, Lina & Li, Zaili, 2019. "Insider trading, representativeness heuristic insider, and market regulation," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 48-64.
    2. repec:ibf:ijbfre:v:11:y:2017:i:2:p:39-56 is not listed on IDEAS
    3. Chu, Chien Chi & Chang, Chiao Yi & Zhou, Rui Jie, 2021. "The nonlinear connection between 52-week high and announcement effect of insider trading — Evidence from mainland China and Taiwan," Economic Modelling, Elsevier, vol. 94(C), pages 1043-1057.
    4. Boussaidi, Ramzi & AlSaggaf, Majid Ibrahim, 2022. "Contrarian profits and representativeness heuristic in the MENA stock markets," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 97(C).
    5. Jiang, Ying & Liu, Hong, 2022. "Insider trading, overconfidence, and private information flow," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).
    6. Chun-An Li & Min-Ching Lee & Ju-Hua Liu, 2018. "Label Co-Movement: Component Stock Inclusion And Exclusion Between Different Exchange-Traded Funds," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 12(1), pages 39-56.

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