Working Paper: NBER ID: w21945
Authors: Kent Daniel; David Hirshleifer
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.
Keywords: overconfidence; investors; predictable returns; excessive trading
JEL Codes: G02; G11; G12; G14; G2; Z23; Z33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| overconfidence (G41) | trading behavior (G41) |
| trading behavior (G41) | trading volume (G15) |
| overconfidence (G41) | asset return predictability (G17) |
| overconfidence (G41) | stock pricing (G13) |
| short-sale constraints (G33) | overpricing of stocks (G10) |
| overconfidence + short-sale constraints (G41) | overpricing of stocks (G10) |
| overconfidence (G41) | self-attribution bias (D91) |