غرور می تواند فضیلت باشد: اعتماد بیش از حد، کسب اطلاعات و کارایی بازار

In behavioral finance, overconfidence has been established as a prevalent psychological bias, which can make markets less efficient by creating mispricing in the form of excess volatility and return predictability. In this paper, we develop a model in which overconfidence causes investors to overinvest in information acquisition when this information could improve market efficiency by driving prices closer to true values. We study the impact of overconfidence on mispricing and information acquisition, comparing their net effect on prices. We derive several novel implications. First, overconfidence generally improves market pricing provided the level of overconfidence is not too high. Pricing can also improve even when overconfidence is arbitrarily high, depending on the amount of private information acquired relative to publicly available information.

In behavioral finance, psychological biases are conjectured to make markets less efficient by generating asset-pricing anomalies such as momentum, reversals, post-announcement drift, and closed-end fund discounts, just to name a few (See Barberis and Thaler, 2003 and DeBondt and Thaler, 1995). Behavioral finance has emerged primarily to explain these anomalies that appear inconsistent with rational, efficient markets. Among various known psychological biases, overconfidence has come to be viewed by behavioralists as an important factor in financial markets because it has been shown by experimental psychologists to exist in many aspects of human behavior. DeBondt and Thaler (1995) state that “perhaps the most robust finding in the psychology of judgment is that people are overconfident.” (For overviews of the relevant psychology literature on overconfidence, see Odean, 1998; Daniel, Hirshleifer, and Subrahmanyam, 1998). In addition, overconfidence seems to explain patterns of trading and prices such as excess trading volume (Odean, 1999), long-term reversals (Daniel, Hirshleifer, and Subrahmanyam, 1998), and excess volatility (Odean, 1998). The motivating idea of this paper is that psychological biases and overconfidence, in particular, might actually make markets more efficient. Specifically, overconfident investors believe that they can earn extraordinary returns and will consequently invest resources in acquiring information pertaining to financial assets. Anecdotally, it seems that professional investors spend a great deal of time and other resources acquiring information about individual companies, industries, and the macroeconomy to make their investment decisions. They invest these resources in spite of it being unclear that they can even achieve returns that recoup these costs (See Elton, Gruber, Das, and Hlavka, 1993; Malkiel, 1995 and Gruber, 1996). In the classic paradigm of Grossman (1976), rational investors have no incentive to acquire information in the absence of noise because they can free-ride by observing prices, which perfectly aggregate all available information. Hence, overconfident investors could introduce information into the market that drives security prices closer to their true values. In the prior literature on overconfident investment, overconfidence generates mispricing, thereby making prices less efficient as measured by “price quality” or the mean-squared error (MSE) between prices and discounted payoffs (e.g., Odean, 1998). Thus, prior models have shown that overconfidence makes markets less efficient unless there are rational arbitrageurs to bring prices to their correct values (See model B from Odean, 1998 and Kyle and Wang, 1997). With endogenous information, however, the incentive of overconfident investors to acquire information is a possible countervailing effect that makes prices more informative and efficient even in the absence of rational traders. This possibility was mentioned by Rubinstein (2001) in an argument for efficient markets. While overconfidence can express itself in other ways, surely it causes many investors to spend too much on research. …As a result, there is a sense in which asset prices become hyper-rational; that is, they reflect not only the information that was cost-effective to impound into prices but also information that was not worthwhile to gather and impound. Overspending on research is not in one's self-interest, but it does create a positive externality for passive investors who now find that prices embed more information and markets are deeper than they should be. In this paper, we combine both the rational and the behavioral perspective to study which of these two effects is larger, the incentive to acquire information or the mispricing caused by overconfidence. We develop a model based on Grossman (1976) of investors with differential information who face the decision of how much to invest in information acquisition. Investment in information increases the precision of the private signal observed regarding the payoff of the risky asset as in Verrecchia (1982) and Litvinova and Ou-Yang (2003). In addition, investors are overconfident, overestimating the precision of their private signals as well as the productivity of their investment in information. Investors trade assets and invest in information in our model because they overestimate their ability to earn excess returns from investment in contrast to the rational case. We use this model to address the question of whether overconfidence with endogenous information acquisition can improve market efficiency as measured by price quality. We find first that a market with overconfident investors generally has better price quality than a rational market as long as the level of overconfidence is not too high. When this cognitive bias is not large, the effect of overconfidence on introducing new information into prices dominates its effect on driving prices away from rational values. In addition, we find that price quality can even improve when the level of overconfidence is arbitrarily high, depending on the amount of private information acquired relative to publicly available information. Price quality improves in this case when there is an abundance of private information produced, i.e., when the number of active investors and per capita expenditure in information acquisition are sufficiently high. These results run contrary to the behavioral presumption that cognitive biases make markets function less efficiently. Our analysis shows that overconfident investors can indeed improve the quality of prices through their information acquisition activities even in the absence of rational traders. The model also gives us novel implications regarding the empirical properties of price quality and, in particular, measures of overreaction in prices such as excess volatility and return predictability. First, the degree of overreaction in prices is decreasing in the number of active investors and the precision of public information and increasing in overconfidence. Second, more precise private information can either decrease or increase mispricing. More accurate private information can increase the informativeness and rationality of prices, but it can also make prices less rational given that investors are overconfident and can overreact to additional private information. The fact that additional private information can either decrease or increase overreaction is a unique prediction of our model, and there appears to be existing evidence in both of these directions. These results also provide empirical tests of our model based on the cross-sectional properties of price overreaction across assets, which have yet to be extensively explored. The remainder of this paper is organized as follows. Section 2 reviews the relevant literature. Section 3 describes the setup of our differential information model with overconfidence and endogenous information acquisition. Section 4 solves the equilibrium for trade and information acquisition. Section 5 analyzes the properties of price quality in our model. Section 6 concludes.

In this paper, we develop a model of information acquisition in a market with overconfident investors. We were able to derive implications from our model regarding the amount of information investment and the efficiency of the market as measured by both price quality and overreaction. Our paper shows that irrationality on the part of investors does not necessarily make markets less efficient. In our model, overconfidence actually improves price quality under certain circumstances. In particular, overconfidence can generate information acquisition, whose effect on price quality can dominate the mispricing caused by this psychological bias. We find that overconfidence generally improves market efficiency over rationality provided overconfidence is not too high because it introduces information into the market while having a comparatively small effect in generating mispricing. In addition, a market with very high overconfidence can also have superior price quality to a rational market when there is a high amount of private information acquired relative to publicly available information. Finally, we were able to use our model to derive implications regarding the empirical properties of overreaction in prices. In particular, one distinct feature of our model is that more private information can either increase or decrease overreaction depending on relevant parameters. These implications can potentially serve as novel empirical tests of our behavioral theory of overreaction based on its cross-sectional properties, which have yet to be extensively studied. We see this paper as a preliminary step and not the final verdict in the analysis of overconfidence, information acquisition, and mispricing. Considerable work remains in the analysis of these issues including the proposed empirical work, modifications to the model, and so on. One important topic, for instance, left absent from our paper is that of welfare analysis. To fully address this issue, one would need a model with explicit utility gains from higher price quality such as the aforementioned model of real investment in which more information would lead to superior investment policies and thereby higher social utility.