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Learning To Be Overconfident And Underconfident

Author

Listed:
  • YUANZHU LU

    (School of Economics and Management, University of Science and Technology Beijing, Beijing, P. R. China)

  • JINMING HU

    (National Equities Exchange and Quotations, Beijing, P. R. China)

  • YAXIAN GONG

    (School of Economics, Central University of Finance and Economics, Beijing, P. R. China)

Abstract

This paper analyzes the overconfident and underconfident trading behavior simultaneously in the context extended from Gervais and Odean (2001) [Learning to be overconfident. Review of Financial Studies, 14(1), 1–27]. We find that the overconfidence level will be first decreasing, then increasing and finally decreasing as the number of the successful predictions increases when the underconfident behavior is sufficiently prominent and the expected trading volume in the future will first decrease then increase and finally decrease as the number of successes increases. Furthermore, the insider’s expected profits in the future are a monotonically increasing function of the number of successes when the number of successes is sufficiently small or large but monotonically decreasing function of this number when it is in the intermediate range. This completes the analysis of the investors’ biased behavior.

Suggested Citation

  • Yuanzhu Lu & Jinming Hu & Yaxian Gong, 2023. "Learning To Be Overconfident And Underconfident," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 68(05), pages 1815-1827, September.
    • Handle: RePEc:wsi:serxxx:v:68:y:2023:i:05:n:s0217590822500801
    DOI: 10.1142/S0217590822500801
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    More about this item

    Keywords

    Overconfidence; underconfidence; trading volume; insider’s profits;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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