Volume, Volatility, Price, and Profit When All Traders Are Above Average
Year: 1998
Type: article
Abstract: People are overconfident. Overconfidence affects financial markets. How depends on who in the market is overconfident and on how information is distributed. This paper examines markets in which price‐taking traders, a strategic‐trading insider, and risk‐averse marketmakers are overconfident. Overconfidence increases expected trading volume, increases market depth, and decreases the expected utility of overconfident traders. Its effect on volatility and price quality depend on who is overconfident. Overconfident traders can cause markets to underreact to the information of rational traders. Markets also underreact to abstract, statistical, and highly relevant information, and they overreact to salient, anecdotal, and less relevant information.
Source: The Journal of Finance
Author: Terrance Odean
Institution: University of California, Davis
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3123792419