The overconfident, or the more informed?

Abstract

We discuss some problems with the modelling methods in the overconfidence literature. We argue that overconfidence models should be well constructed such that overconfident investors in the behavioural model could be distinguished clearly from the more informed investors in the rational asset-pricing model.

Acknowledgement

Hefa Gui would like to acknowledge the financial support from Financial Innovation Team, Financial Development and Risk Management Research Center at Jiangxi University of Finance and Economics.

Notes

¹In his view, noise investors choose to trade partly because they think they have higher ability of investment than others.

²Strictly speaking, it should be stated as ‘The difference between the two results converges almost surely to zero’.

³In the sense of almost surely convergence.

⁴See Berg and Lien (2005) for a distinction between first-moment overconfidence and second-moment overconfidence.

⁵The strand of research may date back to the pioneer work of May (1986).