Learning to Be Overconfident and Underconfident

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.

Specifying and validating overconfidence bias among retail investors: a formative index

“…The overconfidence among investors can be identified from the past investment success (Huang et al, 2022;S ¸enol and Onay, 2023) they have incurred as well as the positive illusions (Parmitasari and Syariati, 2022;Alp Coskun et al, 2023) defining that the investors tend to believe that they are better than average investors in the stock market. The investors were also assessed by their accuracy levels (Liu and Tan, 2021;Lu et al, 2022) in their past investment decisions. The investors' OB was also demonstrated through the perceived control (Lather et al, 2020) which they possess towards their investment decisions.…”

“…, 2023) defining that the investors tend to believe that they are better than average investors in the stock market. The investors were also assessed by their accuracy levels (Liu and Tan, 2021; Lu et al. , 2022) in their past investment decisions.…”

“…Wang et al (2022) and Gadzinski et al (2022) supported the certitude that prediction accuracy is a key ingredient in decision-making. and Lu et al (2022) proposed the importance of predicting stock prices to understand the behavioral pattern of investors. According to Mushinada (2020) and Alrabadi et al (2018), retail investors tend to think they can accurately forecast the direction of the stock market and prefer to trust their judgment when managing their portfolios.…”

“…Liu et al. (2021) and Lu et al. (2022) proposed the importance of predicting stock prices to understand the behavioral pattern of investors.…”

How Overconfident Financial Knowledge Hinders Retirement Planning? Mediating Analysis and Heterogeneity of Retirement Funding Sources

“…Overconfident financial knowledge indicates that individuals overestimate their financial knowledge, leading them to mistakenly believe that they have a good understanding of investment risks and returns, and they can effectively manage risks (Y. Lu et al, 2023). The theory of illusion of control indicates that when an individual encounters a financial risk event, overconfident financial knowledge makes individuals believe that their ability will quell the risk event or reduce financial losses, leading to their excessive negligence in handling the risk event and chasing high risks (Richard et al, 2010).…”