Overconfident Investors, Predictable Returns, and Excessive Trading

摘要

This essay has two main themes: 1) There are anomalies in financial markets-unprofitable active trading, and patterns of return predictability-that are puzzling from the perspective of traditional purely rational models; and 2) models of overcon-fidence, and of the dynamic psychological processes that underlie overconfidence, can plausibly explain why these patterns exist and persist. For those readers who are uncomfortable with an explanation for anomalies based on imperfect rationality, we would point out that the empirical patterns of unprofitable active trading and of return predictability are more-or-less agreed upon both by the leading fans of the efficient markets hypothesis and those with a more behavioral bent. For example, the data underlying the three- and five-factor models of Fama and French (1993; 2015) suggest that portfolios can be built that provide high returns with relatively low volatility. The main disagreement is not over the empirical facts described in this paper, but about what components should be added to an asset pricing model to describe them. We believe that overconfidence offers a useful component, both because of how it explains the agreed-upon facts emphasized here and also because overconfidence promises to help integrate other elements of behavioral finance theory. For example, some authors have emphasized the importance of investor disagreement in understanding financial markets (Hong and Stein 2007). Overconfidence provides a natural explanation for why investors who process the same public information end up disagreeing so much. Limited investor attention has also recently been offered as an explanation for various empirical patterns in trading and prices. Overconfidence explains why investors who neglect important information would nevertheless trade aggressively, so that such neglect can influence price. In these ways and others, overconfidence offers a microfoundation for other important building blocks of behavioral finance models.