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|کد مقاله||سال انتشار||مقاله انگلیسی||ترجمه فارسی||تعداد کلمات|
|19948||2001||12 صفحه PDF||سفارش دهید||4889 کلمه|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Financial Markets, Volume 4, Issue 1, January 2001, Pages 73–84
Recent research has proposed several ways in which overconfident traders can persist in competition with rational traders. This paper offers an additional reason: overconfident traders do better than purely rational traders at exploiting mispricing caused by liquidity or noise traders. We examine both the static profitability of overconfident versus rational trading strategies, and the dynamic evolution of a population of overconfident, rational and noise traders. Replication of overconfident and rational types is assumed to be increasing in the recent profitability of their strategies. The main result is that the long-run steady-state equilibrium always involves overconfident traders as a substantial positive fraction of the population.
Several recent papers have argued that investor overconfidence or shifts in confidence offer a possible explanation for a range of anomalous empirical patterns in securities markets.1 An important general objection to such approaches is that rational traders ought to make profits at the expense of the irrational ones, so that irrationality should in the long run be eliminated as a significant factor in the market.2 This paper offers a new reason for the possible long-run survival of overconfident traders in competition with rational traders. The basic idea is that risk averse, overconfident traders trade more aggressively based on valid information than do rational traders. As a result, overconfident traders are better able to exploit risky profit opportunities created by the trades of liquidity-motivated traders or the mistakes of noise traders.3 Overconfident investors trade aggressively both because they underestimate risk and because they overestimate the conditional expected value from their trading strategies. Since the information they exploit is valid, their more aggressive use of it (either long or short on the risky asset) causes them to earn higher expected profits (though lower expected utility). Their expected profits are limited by the fact that if there are too many overconfident traders, or if their confidence is too extreme, their trading pushes price against them excessively. Rational traders then profit by trading in opposition to overconfident traders. If trader types replicate according to the profitability of their strategies, we show that overconfident traders survive in the long run, and can even drive out rational traders completely. Several authors, beginning with De Long 1990 and De Long 1991, have offered other distinct arguments as to why imperfectly rational traders, including overconfident ones, may survive in the long run.4De Long et al. (1991) examine traders who are overconfident in the sense that they underestimate risk. As a result of underestimating risk, these traders hold more of the risky asset (e.g., the market portfolio). Since the risky asset earns higher expected return, these traders can do well relative to rational traders. Our approach differs from De Long et al. (1991) in the following respects. First, we model overconfidence as overestimation of the precision of private information signals. We therefore derive beliefs endogenously about the payoff of the risky asset. Overconfidence in our sense implies underestimation of risk, consistent with their assumption. It also implies incorrect conditional means. Their assumption of a noise component of trades is implicitly consistent with misassessment of conditional means. However, by deriving beliefs endogenously, our model goes further by constraining the relation between errors in mean assessments and underestimation of risk. In our model the misperceptions of both first and second moments are determined endogenously through Bayes rule. Second, we model prices endogenously. We would often expect irrational traders who trade in a certain direction (e.g., buying a hot internet start-up) to push the price unfavorably to themselves. This influence on price tends to reduce the long-run expected profits to irrational trading. For example, on Friday November 13, 1998, in the first hours of trading after the initial public offering of TheGlobe.com, the price quickly leaped from the offer price of $9 to a price of $97, reflecting enthusiasm on the part of individual investors. By the end of the day the price had fallen by about 1/3, so many investors who bought in the aftermarket took heavy losses. Given the possible adverse effects on price, it is interesting to see whether irrational traders can survive despite having an influence on price. Third, the results of De Long et al. (1991) are driven mainly by a non-informational effect, that overconfident individuals who underestimate risk tilt their portfolios heavily toward the ‘market’ (high risk/high return) security. In our paper, the high profits of the overconfident arise from the overreaction in their assessments of mean, so that these investors exploit their information more aggressively in either a long or short direction. (This effect is reinforced by their underestimation of risk, but would work even if they did not underestimate risk. In contrast, underestimation of risk is essential to the result of De Long et al. (1991).) In so doing, they gain profits by exploiting the mispricing created by liquidity/noise traders. In our model overconfidence is profitable even if the risky security is in zero net supply; it is not a matter of investing more heavily in the market portfolio, but of exploiting information more intensely. Kyle and Wang (1997) provide a distinct reason for the survival of overconfident traders based on imperfect competition in securities markets. An informed trader who knows he is trading against an overconfident informed opponent chokes back on his trades, to the benefit of the overconfident trader.5 An informed trader knows that the price execution in the direction indicated by his signal will be less favorable by virtue of the fact that the overconfident informed trader will trade aggressively based on the same signal. Being perceived as overconfident is in effect like being a Stackelberg leader, which generates oligopoly profits. Benos (1998) develops this theme to examine cases of imperfectly correlated signals. Fischer and Verrecchia (1999) examine ‘heuristic’ traders who, owing to overconfidence or base-rate underweighting, overreact to new signals. In their paper as well, overreaction creates a ‘first mover’ advantage for heuristic traders owing to imperfect competition. In all three papers, holding constant the behavior of other traders, trading more aggressively reduces expected profits; the only benefit of overconfidence comes from being perceived as such by other informed traders. Furthermore, in all three papers, the effects described are only important if the mass of informed traders, and especially overconfident traders, is high enough to influence prices significantly. In contrast with the commitment approach of these papers, in our model traders are perfectly competitive. Traders observe the market price and take it as given. Thus, a trader does not limit the size of his position out of fear that an overconfident informed trader will trade intensely in the same direction. The benefit to overconfidence in our model is that overconfident traders are willing to take on more risk, and hence better exploit the mispricing generated by the trades of ‘noise’ or liquidity traders. Unlike the commitment approach discussed above, in our model this benefit applies even if there is only a very small measure of informed traders. In other words, the profits arise not from the commitment to be aggressive (and the desirable effects of such commitment upon the behavior of other traders), but directly from the aggressiveness of the trading strategy. 6 In principle, an overconfident trader ought to learn based on his past performance that the precision of his signal is not as great as he thought. If such learning were rational, overconfidence would disappear. This line of reasoning clashes with the extensive empirical evidence from psychology, based on both experimental, survey and case research, that most individuals tend to be overconfident.7 We do not model the process by which individuals learn about their own abilities; see however, the analyses of Daniel et al. (1998) and Gervais and Odean (2000). These models are based on evidence from psychology that in updating beliefs about their own abilities, individuals tend to credit themselves for favorable outcomes strongly, and to blame external factors for unfavorable outcomes (Daniel et al. (1998) discuss several such studies.) This phenomenon is termed self-attribution bias. This bias in the learning process explains why overconfidence exists persistently. Such an effect tends to maintain the importance of overconfidence in a dynamic steady state even if overconfident traders lose money. Our approach differs in that we do not allow a trader's confidence to grow over time. Nevertheless, overconfident traders can thrive profitably. Section 2 of the paper describes the basic model with three types of agents (rational, overconfident and liquidity/noise traders) who invest in a risk-free and a risky asset. Section 3 models the long-run survival of overconfidence in an evolutionary process where trader types replicate according to their expected profits. Section 4 describes results, and Section 5 gives concluding remarks.
نتیجه گیری انگلیسی
Recent research has proposed several ways in which overconfident traders can persist despite competition from rational traders. This paper offers an additional reason: overconfident traders do better than purely rational traders at exploiting misvaluation caused by liquidity or noise trading. Using a model of a perfectly competitive asset market involving rational traders, overconfident traders and liquidity/noise traders, we examine both the static profitability of overconfident versus rational trading strategies, and the dynamic evolution of the population of traders. Different investor types are assumed to become more prevalent when their strategies are more profitable. In some cases there is an interior equilibrium with both rational and overconfident traders. If the degree of risk aversion, the volatility of liquidity/noise trading or the volatility of the underlying security payoff becomes sufficiently large, rational traders are driven out of the market and only overconfident traders survive. The higher the noise volatility and the higher the volatility of the underlying security payoff, the larger is the proportion of surviving overconfident traders. The more intense is their confidence, the lower is the proportion of surviving overconfident traders. Finally, our main result is that unless the degree of overconfidence is infinite, the long-run steady-state equilibrium always involves overconfident traders surviving as a positive fraction of the population.