Overconfident Investors, Predictable Returns, and Excessive Trading

Kent Daniel, David Hirshleifer

NBER Working Paper No. 21945
Issued in January 2016
NBER Program(s):   AP 

Individuals and asset managers trade aggressively, resulting in high volume in asset markets, even when such trading results in high risk and low net returns. Asset prices display patterns of predictability that are difficult to reconcile with rational expectations–based theories of price formation. This paper discusses how investor overconfidence can explain these and other stylized facts. We review the evidence from psychology and securities markets bearing upon overconfidence effects, and present a set of overconfidence based models that are consistent with this evidence.