Learning to Be Overconfident

Gervais, Simon; Odean, Terrance

doi:10.1093/rfs/14.1.1

Cited by 1,310 publications

(368 citation statements)

References 22 publications

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“…Gervais and Odean (2001) find that initially over-confident traders tend to, over time, become more rational so that, cross-sectionally, at any given point in time a fraction of overconfident traders cohabitates with their rational colleagues. their signal, trade more aggressively on their private signals than rational traders.…”

Section: Introductionmentioning

confidence: 89%

Overconfidence and Market Efficiency with Heterogeneous Agents

2006

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We study financial markets in which both rational and overconfident agents coexist and make endogenous information acquisition decisions. We demonstrate the following irrelevance result: when a positive fraction of rational agents (endogeneously) decides to become informed in equilibrium, prices are set as if all investors were rational, and as a consequence the overconfidence bias does not affect informational efficiency, price volatility, rational traders' expected profits or their welfare. Intuitively, as overconfidence goes up, so does price infornativeness, which makes rational agents cut their information acquisition activities, effectively undoing the standard effect of more aggressive trading by the overconfident.JEL classification: D80, G10.

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Section: Introductionmentioning

confidence: 89%

Overconfidence and Market Efficiency with Heterogeneous Agents

2006

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“…Even if there is no overconfidence on average in the population of potential managers, those that are overconfident are more likely to perform extremely well (and extremely badly), placing them disproportionately in the ranks of upper (and former) management. And fourth, even if managers start out without bias, an attribution bias-the tendency to take greater responsibility for success than failure (e.g., Langer and Roth (1975))-may lead successful managers to become overconfident, as in Gervais and Odean (2001).…”

Section: The Irrational Managers Approachmentioning

confidence: 99%

Behavioral Corporate Finance: A Survey

Baker

Ruback²,

Wurgler

2004

SSRN Journal

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Research in behavioral corporate finance takes two distinct approaches. The first emphasizes that investors are less than fully rational. It views managerial financing and investment decisions as rational responses to securities market mispricing. The second approach emphasizes that managers are less than fully rational. It studies the effect of nonstandard preferences and judgmental biases on managerial decisions. This survey reviews the theory, empirical challenges, and current evidence pertaining to each approach. Overall, the behavioral approaches help to explain a number of important financing and investment patterns. The survey closes with a list of open questions.

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“…This could be used to explain underreaction and overreaction phenomena. In addition, Gervais and Odean (2001) argue that insider traders put higher weights on a security's dividend if they successfully predict their past performance and use the Bayes rule to update their prediction.…”

Section: Introductionmentioning

confidence: 99%

A Bayesian approach to excess volatility, short-term underreaction and long-term overreaction during financial crises

Guo

McAleer

Wong

et al. 2017

The North American Journal of Economics and Finance

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractIn this paper, we introduce a new Bayesian approach to explain some market anomalies during financial crises and subsequent recovery. We assume that the earnings shock of an asset follows a random walk model with and without drift to incorporate the impact of financial crises. We further assume the earning shock follows an exponential family distribution to take care of symmetric as well as asymmetric information. By using this model setting, we develop some properties on the expected earnings shock and its volatility, and establish properties of investor behavior on the stock price and its volatility during financial crises and subsequent recovery. Thereafter, we develop properties to explain excess volatility, short-term underreaction, long-term overreaction, and their magnitude effects during financial crises and subsequent recovery.

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Learning to Be Overconfident

Cited by 1,310 publications

References 22 publications

Overconfidence and Market Efficiency with Heterogeneous Agents

Overconfidence and Market Efficiency with Heterogeneous Agents

Behavioral Corporate Finance: A Survey

A Bayesian approach to excess volatility, short-term underreaction and long-term overreaction during financial crises

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