We examine changes in the stock trading behavior and investment performance of 1,607 investors who switch from phone based to online trading during the period 1992 to 1995. We document that young men who are active traders with high incomes and a preference for investing in small growth stocks with high market risk are more likely to switch to online trading. We also find that those who switch to online trading experience unusually strong performance prior to going online, beating the market by more than two percent annually. After going online, they trade more actively, more speculatively, and less profitably than before-- lagging the market by more than three percent annually. A rational response to reductions in market frictions (lower trading costs, improved execution speed, and greater ease of access) does not explain these findings. The increase in trading and reduction in performance of online investors can be explained by overconfidence augmented by self-attribution bias, the illusion of knowledge, and the illusion of control.

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Using financial incentives, we study how portfolio choice (how much to invest in a risky asset) depends on three well-known behavioral phenomena: ambiguity aversion, the illusion of control, and myopic loss aversion. We find evidence that these phenomena are present and test how the level of investment is affected by these motivations; at the same time, we investigate whether participants are willing to explicitly pay a small sum of money to indulge preferences for less ambiguity, more control, or more frequent feedback/opportunities to choose the investment level. First, the observed preference for ‘‘control’ ’ did not affect investment behavior and in fact disappeared when participants were asked to actually pay to gain more control. Second, while people were indeed willing to pay for less ambiguity, the level of ambiguity did not influence investment levels. Finally, participants were willing to pay to have more frequent feedback opportunities to change their portfolio, even though prior research has shown that people invest less in risky assets (and earn less) in this case. (JEL B49, C91, D81, G11, G19) I.

People are often presumed to be vulnerable to a desirability bias, namely, a tendency to be overoptimistic about a future outcome as a result of their preferences or desires for that outcome. In this article, this form of wishful thinking is distinguished from the more general concepts of motivated reasoning and overoptimism, and the evidence for this bias is reviewed. The authors argue that despite the prevalence of the idea that desires bias optimism, the empirical evidence regarding this possibility is limited. The potential for desires to depress rather than enhance optimism is discussed, and the authors advocate for greater research attention to mediators of both types of effects. Nine possible mediational accounts are described, and critical issues for future research on the desirability bias are discussed.

East Asian cognition has been held to be relatively "holistic", that is, attention is paid to the field as a whole. Western cognition, in contrast, has been held to be object-focused and control-oriented. We compared East Asians (mostly Chinese) and Americans on detection of covariation and field dependence. The results showed that (1) Chinese participants reported stronger association between events, were more responsive to differences in covariation, and were more confident about their covariation judgments; (2) These cultural differences disappeared when participants believed they had some control over the covariation judgment task; (3) American participants made fewer mistakes on the Rod-and-Frame test, indicating that they were less field dependent; (4) American performance and confidence, but not that of Asians, increased when participants were given manual control of the test. Possible origins of the perceptual differences are discussed. Characters (with spaces): 958 3 Scholars ...

The Internet is changing how information is delivered to investors and the ways in which investors can act on that information. It has lowered both the fixed and marginal costs of producing financial services, thus enabling newer, smaller companies to challenge established providers of these services. On-line brokerage firms, such as E*Trade and Ameritrade, are among the most vivid and successful financial service firms to emerge in the last decade. 1 Other firms, which provide on-line financial advice, research tools, and financial information, have also emerged. 2 These e-commerce firms are transforming the way traditional services are delivered and offering a vast assortment of new services. As a result, investors entering the market today have options unheard of ten years ago. From 1995 through mid-2000, investors opened 12.5 million on-line brokerage accounts—a number projected to grow to more than 42 million by 2003 (Cerulli Associates, 2000; Robertson Stephens, 2000). In 1998, on-line trading accounted for about 37 percent of all retail (that is, noninstitutional) trading volume in equities and options (U.S. General Accounting Office, 2000, p. 7). In a 1 Ameritrade at

Theoretical models predict that overconfident investors will trade more than rational investors. We directly test this hypothesis by correlating individual overconfidence scores with several measures of trading volume of individual investors (number of trades, turnover). Approximately 3000 online broker investors were asked to answer an internet questionnaire which was designed to measure various facets of overconfidence (miscalibration, the better than average effect, illusion of control, unrealistic optimism). The measures of trading volume were calculated by the trades of 215 individual investors who answered the questionnaire. We find that investors who think that they are above average in terms of investment skills or past performance trade more. Measures of miscalibration are, contrary to theory, unrelated to measures of trading volume. This result is striking as theoretical models that incorporate overconfident investors mainly motivate this assumption by the calibration literature and model overconfidence as underestimation of the variance of signals. The results hold even when we control for several other determinants of trading volume in a cross-sectional regression analysis. In connection with other recent findings, we conclude that the usual way of motivating and modelling overconfidence which is mainly based on the calibration literature has to be treated with caution. We

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We perform an asset market experiment in order to test the central result coming from the new overconfidence models, namely that high levels of overconfidence lead to enhanced trading activity. We find that overconfidence does engender additional trade. Unlike previous experimental or survey-based evidence, ours is the first study to find this to be so when overconfidence is measured using a calibration-based approach that is most akin to the theoretical literature. Further, we investigate the contention that gender influences trading activity through overconfidence. There is no evidence of this, as women have about the same level of both overconfidence and trading activity as do men, and gender is not a useful explanatory variable of trading in a multivariate regression. 2