Overconfidence
"Overconfidence and anchoring definitely appear to be part of the explanation underlying post-earnings-announcement drift." SHEFRIN, Hersh, Beyond Greed and Fear : Understanding Behavioral Finance and the Psychology of Investing
"There are two main implications of investor overconfidence. The first is that investors take bad bets because they fail to realize that they are at an informational disadvantage. The second is that they trade more frequently than is prudent, which leads to excessive trading volume." SHEFRIN, Hersh, Beyond Greed and Fear : Understanding Behavioral Finance and the Psychology of Investing.
"The classic study in over-confidence is Lichenstein, Fischoff and Philips (1977)." MONTIER, James, Behavioural Finance: Insights into Irrational Minds and Markets.
"Overconfidence, however generated, appears to be a fundamental factor promoting the high volume of trade we observe in speculative markets. Without such overconfidence, one would think that there would be little trading in financial markets." Shiller (2000)
There are many behavioural traits that are inherent in our nature, and easily proven. For example, overconfidence. How does overconfidence manifest itself in the nature of a financial time series?
- High volume of trade (especially in a bull market)
- Over-extended bull markets
- Propagation of speculative bubbles
Most importantly, if people weren?t overconfident, they simply wouldn?t trade at all. However, it seems unlikely that we can capture investors? inherent overconfidence and use it to our advantage in a predictive sense.
Overconfidence can cause investors to underreact to new information.
[Shiller] "Another aspect of overconfidence is that people tend to make judgments in uncertain situations by looking for familiar patterns and assuming that future patterns will resemble past ones, often without sufficient consideration of the reasons for the pattern or the probability of the pattern repeating itself. This anomaly of human judgment, called the representativeness%20heuristic,%20was%20demonstrated%20in%20a%20number%20of%20experiments%20by%20psychologists%20Tversky%20and%20Kahneman." < p>
Overconfidence [one word]
[Shiller]"Yet some basic tendency towards overconfidence appears to be a robust human character trait: the bias is definitely toward overconfidence rather than underconfidence."[lots of reasons for overconfidence]
"Overconfidence, however generated, appears to be a fundamental factor promoting the high volume of trade we observe in speculative markets.
"To understand speculative bubbles, positive or negative, we must appreciate that overconfidence in one's own intuitive judgments plays a fundamental role."
[Shefrin]p300"In addition, people tend to be overconfident in their predictions." "There are two main implications of investor overconfidence. The first is that investors take bad bets because they fail to realize that they are at an informational disadvantage. The second is that they trade more frequently than is prudent, which leads to excessive trading volume."
"Overconfidence: Too Much Trading"
"the individuals who traded most fared worst, underperforming the index by 500 basis points."
"Barber and Odean suggest that investors are overconfident in their abilities."
[Peters]p35"However, people have a common tendency to make overconfident predictions. The brain is probably designed to make decisions with as much certainty as possible, after receiving little information. For survival purposes, confidence in the face of uncertainty is a characteristic
[Shleifer]p33 "...they may incorrectly perceive the riskiness of returns, perhaps because they are overconfident."
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