Leveraging Overconfidence

76 Pages Posted: 7 Sep 2019 Last revised: 4 Dec 2020

See all articles by Brad M. Barber

Brad M. Barber

University of California, Davis

Xing Huang

Washington University in St. Louis - Olin Business School

K. Jeremy Ko

Upstart

Terrance Odean

University of California, Berkeley - Haas School of Business

Date Written: November 30, 2020

Abstract

In theory, investors who have low security selection ability trade more, use leverage more, and perform worse if they are overconfident. We confirm these predictions empirically by analyzing the overconfidence, trading, and performance of retail investors who use margin. Using survey data, we measure overconfidence as the difference between an investor’s self-assessment of knowledge and tested knowledge; margin investors have greater overconfidence than cash investors. Using broker data, we find margin investors trade more, speculate more, and have worse security selection ability than cash investors. A long-short portfolio that follows the trades of margin investors loses 35 bps per day.

Keywords: Individual Investors, Margin, Overconfidence, Stock Trading

JEL Classification: G41, G11, G12

Suggested Citation

Barber, Brad M. and Huang, Xing and Ko, Kwangmin and Odean, Terrance, Leveraging Overconfidence (November 30, 2020). Available at SSRN: https://ssrn.com/abstract=3445660 or http://dx.doi.org/10.2139/ssrn.3445660

Brad M. Barber (Contact Author)

University of California, Davis ( email )

Graduate School of Management
One Shields Avenue
Davis, CA 95616
United States
530-752-0512 (Phone)
530-752-2924 (Fax)

Xing Huang

Washington University in St. Louis - Olin Business School ( email )

Simon Hall 211
Washington University in St. Louis
St. Louis, MO 63130
United States

Kwangmin Ko

Upstart ( email )

2950 S Delaware St #300
San Mateo, CA 94403
United States
2022570741 (Phone)

Terrance Odean

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-6767 (Phone)
510-666-2561 (Fax)

HOME PAGE: http://www.haas.berkeley.edu/faculty/odean.html

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