ABSTRACT
People can be overconfident about their abilities, knowledge, and future prospects. Overconfidence leads to excessive trading, which lowers portfolio returns. Lower returns result from the commission costs associated with high levels of trading and the propensity to purchase stocks that underperform the stocks that are sold. Overconfidence also leads to greater risk taking due to underdiversification and a focus on investing in small companies with higher betas. Individual investors are most likely to get overconfident after experiencing high returns, like after a strong bull market. Finally, the trend of using online brokerage accounts is making investors more overconfident than ever before.
