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Overconfident investors, predictable returns, and excessive trading

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  • Hirshleifer, David
  • Daniel, Kent

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.

Suggested Citation

  • Hirshleifer, David & Daniel, Kent, 2015. "Overconfident investors, predictable returns, and excessive trading," MPRA Paper 69002, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:69002
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    File URL: https://mpra.ub.uni-muenchen.de/69002/1/MPRA_paper_69002.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    investor overconfidence; aggressive trading; return predictability; trading volume; return momentum; return reversal;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D1 - Microeconomics - - Household Behavior
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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

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