Are Individual Investors Really Overconfident.docx

Are Individual Investors Really Overconfident.docx

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AreIndividualInvestorsReallyOverconfident

AreIndividualInvestorsReallyOverconfident?

AsurveyonTaiwanStockMarket

Min-HuaKuo

AssociateProfessor,DepartmentofFinance,ShihHsinUniversity,Taiwan

mhkuo@cc.shu.edu.tw

6F,No.111,Sec.1,MuChaRd.Taipei,Taiwan,ROC.

TEL:

886-2-22368225ext63435

Nai-FongKuo

AssociateProfessor,DepartmentofFinance,ShihHsinUniversity,Taiwan

kkkuuu@cc.shu.edu.tw

6F,No.111,Lane17,Sec.1,MuChaRd.Taipei,Taiwan,ROC.

TEL:

886-2-22368225ext63431

Ming-YauZhang

Student,DepartmentofFinance,ShihHsinUniversity,Taiwan

6F,No.111,Sec.1,MuChaRd.Taipei,Taiwan,ROC.

TEL:

886-2-22368225ext63435

AreIndividualInvestorsReallyOverconfident?

AsurveyonTaiwanStockMarket

Abstract

TheideaofhumanbeingsareoverconfidenthasearnedquiteaconcordanceintheemergingstudiesofBehavioralFinanceoverthepastfewyears.Manyscholarsfindsomeanomalies,suchasthefactofover-trading,canbeexplainedsatisfactorilyandconvenientlywiththereasonofoverconfidence.Itcauseslittledoubtwhenonehearsthesuggestionthatinvestorsareoverconfident.However,wemayhaveasecondthoughtifthinkitcarefully.Investmentishighlycomplicated,filledwithuncertainlyandgivesquickfeedback,isitnotmorelikelythattheinvestorswillfeelunderconfident,insteadofoverconfident,towinoverthisgame?

Inthisstudywepresentevidencestoshowthatinvestorsdorevealthedispositionofoverconfidenceingeneralcases,however,theyturnintodiffidenceinthesituationofinvestment.Moreover,wefindnoconsistentevidencetosupporttheargumentofoverconfidenceleadingtoovertrading.Thetradingfrequencyhasnothingtodowithconfidence.Whetherpeopletendtooverconfideseemstodependon,atleastpartly,thescenario’sfeature.Whenfacingasituationofgreatuncertaintyandcomplication,peopletendtobeunder-confident,insteadofoverconfident.TheanalysisisbasedonanationwidesurveyonindividualinvestorsinTaiwanstockmarket.Thesamplingerrorislowerthan3%.

Introduction

ThatpeopleareinclinedtobeoverconfidenthasearnedquiteaconcordanceinthefieldsofPsychologyandBehavioralFinance.ThemeasurementsofoverconfidenceusedinPsychologyaremultifold,includinginterviewandexperiments.ThewaytoclaimconfidenceintheBehavioralFinance,however,isofindirection.Itdoesnotofferevidencesto“prove”thatpeopleareoverconfident,instead,itborrowsthispopularbelieftoexplainwhyinvestorsovertrade.TaketheexamplesoftheeminentseriesofpaperauthoredbyOdeanandBarber,amongothers.Theyexploreindividuals’investmentbehaviorsbytheuseofastockbroker’sclientaccounts.Oneoftheirmainsuggestions,besidesmanyothervaluableinsights,isthatoverconfidenceleadsinvestorstoovertradingwhentheyfindthatovertradingishazardoustotheinvestmentreturns.Maleinvestorstrademorefrequentlythanfemalebecausetheyaremoreoverconfidentthanfemale.Itcauseslittledoubtwhenonehearsthesuggestionthatinvestorsareoverconfident,maybebecausewearesubjecttotheanchoringeffect（anchoredbythepopularbeliefthatpeoplearealwaysoverconfident）orbecausemostofusdohavethesimilarexperienceindailylife.However,wemayhaveasecondthoughtifthinkitcarefully.Investmentissuchaknowledgeintensiveactivityandfilledwithuncertainly,andfeedbacksfast,isitnotmorelikelythattheinvestorswillfeelunderconfident,insteadofoverconfident,towinoverthisgame?

Withthefactthatsomanypotentialcausescouldmakeaninvestortrademore（suchasinvestmentstrategies,liquidityneeds,portfoliobalance,ortheindividual’spersonalityofinner/outercontrol,etc.）,whatisthesolidgroundsallowingustoclaimthatoverconfidence,insteadofdiffidenceorfear,makespeoplemove?

Amorerefinedresearchintoinvestors’attitudesisneededbeforeweareentitledtomakeanyclaimabouttheirover（orunder）confidence.

WeutilizethenationaldatabankoftheInvestorSentimentIndexinTaiwanmadebyShihHsinUniversity.ItisanationwidebimonthlysurveyoftheindividualstockinvestorsinTaiwan,withsamplingerrorkeptbelow3%.Inthestudy,adelicatelydesignedquestionsetisaskedtodistinguishtheself-confidenceindifferentsituations.Weendeavortoanswerthequestions:

Areinvestorsreallyoverconfident?

Doestheself-confidencevaryoverdifferentdomains（suchasinthegeneralsituationvs.intheinvestmentscenario）?

Isitappropriatetoclaimoverconfidencebyovertrading?

Accordingtoouranalysis,investorsdoshowthedispositionofoverconfidenceingeneralcases,however,theyturnintodiffidenceregardinginvestment.Moreover,wefindnoconsistentevidencetosupportthatoverconfidenceleadstoovertrading.Thetradingfrequencyhasnothingtodowithconfidence.Whetherpeopletendtooverconfidemaydependonthescenario’sfeature.Whenfacingasituationofgreatuncertaintyandcomplication,peopletendtobeunder-confident,insteadofoverconfident.

Thearticlestructureisarrangedasfollows:

Thefirstsectionisintroduction,introducingtheresearchbackgroundandthegapremainstofill.Thenliteraturereviewfollows.Thethirdandfourthsectionsexplainrespectivelythemethodologyinuseandtheempiricalresults.Conclusionscomeinthefinalsectionandtheimplicationoftheresearchisdiscussedtheretoo.

Literaturereview

FollowingtheemergenceandrapiddevelopmentofBehavioralFinance,therolesofinnerattitudeshaveearnedgreatattention.Amongthem,overconfidenceisprobablytheonediscussedmostanddebatedleast[seeThaler,1995;DeBondtandThaler,1990;Daniel,Hirshleifer,Subrahmanyan,1998;GervaisandOdean,1998;DeLong,1993;DeBondt,1993;KahnemanandRiepe,1998,etc.].Mostpeopledoshowoverconfidentabouttheirownrelativeabilities,andunreasonablyoptimisticabouttheirfutures,accordingtothepsychologicalandexperimentaleconomicsstudies.Whenassessingalmostanypositivetraits,avastmajorityofpeoplebelievetheyareabovetheaverage,althoughonlyhalfcanbe（ifthetraitissymmetricallydistributed）.Thatis,peopleseemtobelievetheyaremoreskillfulthantheyreallyare[e.g.,Svenson,1981;Weinstein,1980;TaylorandBrown,1988;Lichtenstein,FischhoffandPhilips,1982].Byquestionnairesurvey,Lichtenstein,FischhoffandPhilips[1982]findthatpeopleveryoftenoverestimatetheprobabilityofcorrectnessoftheiranswers.evenwhentheyare“sure”theiranswersarecorrect,ashighas20%ofthemareactuallywrong.Usinggamesofskill,CamererandLovallo[1999]reportonoverconfidenceinbusinessentrydecisions.Asubel[1991]analyzesmarketdataandindicatesthatthecreditcardholdersbeingoverconfidentabouttheirfutureabilitytoavoidoverdrawnaccounts.Theevidenceofoverconfidenceisabundant.

Asfortherelationbetweenoverconfidenceandinvestmentbehavior,someresearchersattempttobuildtheoreticalmodelsandothersdoempiricalanalysis.Fortheformer,Daniel,HirshleiferandSubrahmanyam[1998]proposethatindividualinvestorsareoverconfidentwhentheyoverestimatethecorrectnessoftheirprivateinformation.Odean[1998]proposesastaticmodelandshowsthattheoverconfidenceofinvestorsraisesbothmarkettradingvolumeandpricevolatility,andthusexpectedutilityarereducedandunnecessarysociallossarebroughtabout.Whentheinvestorsoverestimatetheprecisionoftheirprivateinformation,theytendtooveract;thepriceswillnotbacktotheequilibriumuntiltherealityreveals.Thereforethemarketpricevolatilityandlong-termreturnsarenegativerelated.

Regardingtheempiricalstudies,mostpapersinferinvestorstobeoverconfidentbecausetheobviousfactofover-tradingandtheassociatenegativeeffectsonreturns.Forexample,BarberandOdean[1999]findthatindividualinvestorstrademuchmorethanexpectedandtheysuggestitisduetotraders’overconfidence.Theyalsoinvestigatethetradingdatafrom166investmentclubsin1991-1997,andfindtheinvestorsnotonlytradeveryoftenbutpreferhigh-risksmallfirms[BarberandOdean,2000a].Thereturnstheygetseemnotverysatisfactory:

60%ofthemarebelowthemarketaverage,whichtheauthorsbelieveatleastpartlythankstooverconfidence.Furthermore,theyexamine35,000tradingaccountsfromanationalsecuritybrokerandreportthattheaverageturnoverofmaleishigherthanfemale,causingmale’sinvestmentreturnslessby2.65%thanthegrossreturns,morethanthatof1.72%offemale.Again,theauthorssuggestitisbecausemaleismoreoverconfidentthanfemale[BarberandOdean,2000b;BarberandOdean,2001].StatmanandThorley[1999]proposethathighreturnscauseoverconfidence,whichleadstoover-trading,and,itinteractsfurtherwithdispositioneffect,bringingabouttheDisposition-Overconfidenceeffect.Thatis,highvolumesarerelatedwiththehighreturnsweeksormonthsago,whilelowvolumeswithhighvolatilitiesweeksormonthsago.ChuangandLee[2006]buildupVARandGARCHmodelstoproposethatoverconfidentinvestorsoveractonprivateinformationbutunderactonpublicinformation.Theoverconfidentinvestorstradetoomuchandwhichleadstoover-volatility:

theoverconfidentinvestorsapttounderestimateriskandthustradetoomuchontheriskysecurities.Theyareevenmoreoverconfidentaftermakingprofitsandthentradefurthermore,inaccordancewithwhatStatmanandThorley[1999]report.Still,Bengtsson[2005]makeuseofquestionnairetoinvestigatethestudentsofStockholmUniversityandcomparetheoptimismandconfidencebetweenmaleandfemale.Theyfindthatmalearemoreo