Learning to be overconfident

Published

Journal Article

We develop a multiperiod market model describing both the process by which traders learn about their ability and how a bias in this learning can create overconfident traders. A trader in our model initially does not know his own ability. He infers this ability from his successes and failures. In assessing his ability the trader takes too much credit for his successes. This leads him to become overconfident. A trader's expected level of overconfidence increases in the early stages of his career. Then, with more experience, he comes to better recognize his own ability. The patterns in trading volume, expected profits, price volatility, and expected prices resulting from this endogenous overconfidence are analyzed.

Full Text

Duke Authors

Cited Authors

  • Gervais, S; Odean, T

Published Date

  • January 1, 2001

Published In

Volume / Issue

  • 14 / 1

Start / End Page

  • 1 - 27

International Standard Serial Number (ISSN)

  • 0893-9454

Digital Object Identifier (DOI)

  • 10.1093/rfs/14.1.1

Citation Source

  • Scopus