Review of Finance Advance Access originally published online on September 23, 2008
Review of Finance 2009 13(3):555-575; doi:10.1093/rof/rfn023
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An Experimental Test of the Impact of Overconfidence and Gender on Trading Activity
1 DeGroote School of Business, McMaster University
2 Center for European Economic Research (ZEW)
3 McKinsey & Company, Inc.
We perform an asset market experiment in order to investigate whether overconfidence induces trading. We investigate three manifestations of overconfidence: calibration-based overconfidence, the better-than-average effect and illusion of control. Novelly, the measure employed for calibration-based overconfidence is task-specific in that it is designed to influence behavior. We find that calibration-based overconfidence does engender additional trade, though the better-than-average also appears to play a role. This is true both at the level of the individual and also at the level of the market. There is little evidence that gender influences trading activity.
JEL Classifications: G10, G11, G12, G14
The authors gratefully acknowledge the co-editor's valuable suggestions in improving the paper's exposition and two anonymous referrers’ valuable comments. In addition, the authors would like to thank the very helpful comments of Lucy Ackert, Ben Amoako-Adu, Bruno Biais, Tim Cason, Narat Charupat, Günter Franke, Simon Gervais, Markus Glaser, Patrik Guggenberger, Michael Haigh, Joachim Inkmann, Marhuenda Joaquin, Alexander Kempf, Brian Kluger, Roman Kraeussl, Bina Lehmann, Tao Lin, Harald Lohre, Greg Lypny, Elizabeth Maynes, Moshe Milevsky, Dean Mountain, Gordon Roberts, Chris Robinson, Stefan Rünzi, Gideon Saar, Dirk Schiereck, Harris Schlesinger, Chuck Schnitzlein, Michael Schröder, Betty Simkins, Brian Smith, Issouf Soumare, Yisong Tian, Chris Veld, Boyce Watkins, Martin Weber and Stephan Wiehler, along with seminar participants from American Finance Association 2005 (Philadelphia), the Economic Science Association 2004 (Amsterdam), the Financial Management Association 2004 (New Orleans), the Financial Management Association European Meeting 2004 (Zurich), European Financial Management Association 2004 (Basle), the Northern Finance Association (St. John's, Newfoundland), the 2004 Symposium for Experimental Finance at the Aston Centre for Experimental Finance (Aston Business School), the 2005 Federal Reserve Bank of Atlanta Experimental Finance Conference, the University of Köln, the University of Konstanz, McMaster University, the University of Tilburg, Wilfred Laurier University and York University. Valuable technical assistance was provided by Harald Lohre, Amer Mohamed and John O’Brien. Generous financial assistance from ZEW, Institut de Finance Mathématiques de Montréal and SSHRC is gratefully acknowledged. Any views expressed represent those of the authors only and not necessarily those of McKinsey & Company, Inc.