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How Does Investor Confidence Lead to Trading? Linking Investor Return Experiences, Confidence, and Investment Beliefs

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Abstract

Confident investors trade more than less confident investors, but why? Prior research tests the ultimate relation between investor confidence and trading, but does not empirically examine the underlying mechanism that explains why confidence leads to trading. We complement the literature by developing a conceptual framework and presenting empirical evidence on a psychologically plausible mechanism through which confidence leads to trading. Using a combination of individual investors' brokerage records and matching monthly survey data, we show that more confident investors rely more on intuitive judgments when forming beliefs about expected returns. In particular, they rely more on naive reinforcement learning and extrapolate individual return experiences into the future more strongly. Given the same return experience, more confident investors change their beliefs more strongly, providing more reason to trade. Ultimately, confident investors have higher turnover, which hurts their performance. (C) 2016 Elsevier B.V. All rights reserved.

    Research areas

  • Belief formation, Individual investors, Investor confidence, Naive reinforcement learning, Return experiences, Trading, COMMON-STOCK INVESTMENT, INDIVIDUAL INVESTORS, OVERCONFIDENCE, BEHAVIOR, PERFORMANCE, ACCOUNTS, VOLUME, BIAS

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Details

Original languageEnglish
Pages (from-to)65-78
Number of pages14
JournalJournal of Behavioral and Experimental Economics
Volume12
DOIs
Publication statusPublished - Dec 2016