Theoretical models predict that overcon�dent investors trade excessively. We test this prediction by partitioning investors on gender. Psychological research demonstrates that, in areas such as �nance, men are more overcon�dent than women. Thus, theory predicts that men will trade more excessively than women. Using account data for over 35,000 households from a large discount brokerage, we analyze the common stock investments of men and women from February 1991 through January 1997. We document that men trade 45 percent more than women. Trading reduces men’s net returns by 2.65 percentage points a year as opposed to 1.72 percentage points for women. It’s not what a man don’t know that makes him a fool, but what he does know that ain’t so. Josh Billings, nineteenth century American humorist It is dif�cult to reconcile the volume of trading observed in equity markets with the trading needs of rational investors. Rational investors make periodic contributions and withdrawals

This article argues that (a) ego, or self, is an organization of knowledge, (b) ego is characterized by cognitive biases strikingly analogous to totalitarian information-control strategies, and (c) these totalitarian-ego biases junction to preserve organization in cognitive structures. Ego's cognitive biases are egocentricity (self as the focus of knowledge), "beneffectance" (perception of responsibility for desired, but not undesired, outcomes), and cognitive conservatism (resistance to cognitive change). In addition to being pervasively evident in recent studies of normal human cognition, these three biases are found in actively functioning, higher level organizations of knowledge, perhaps best exemplified by theoretical paradigms in science. The thesis that egocentricity, beneffectance, and

The field of modern financial economics assumes that people behave with extreme rationality, but they do not. Furthermore, people’s deviations from rationality are often systematic. Behavioral finance relaxes the traditional assumptions of financial economics by incorporating these observable, systematic, and very human departures from rationality into standard models of financial markets. We highlight two common mistakes investors make: excessive trading and the tendency to disproportionately hold on to losing investments while selling winners. We argue that these systematic biases have their origins in human psychology. The tendency for human beings to be overconfident causes the first bias in investors, and the human desire to avoid regret prompts the second. There is one important caveat to the notion that we live in a new economy, and that is human psychology... which appears essentially immutable.

∗This paper is an updated version of a previous working paper, “The Positive Role of Overconfidence and

We experimentally test overconfidence in investment decisions by offering participants the possibility to substitute their own for alternative investment choices.

This paper focuses on egocentric biases in financial decisions. Subjects first design a portfolio, whereby each combination of assets yields the same expected return and variance of returns. They are then confronted with two alternative portfolios; the average portfolio and the portfolio of one's selected expert. Illusion of expertise prevails if one prefers nevertheless the own portfolio. Using the random price mechanism reveals that most subjects prefer their own portfolio to the average or the expert's portfolio. Illusion of expertise is shown to be stable individually, over alternatives, and for both elicitation methods, willingness to pay and to accept.

This paper is an updated version of a previous working paper, “Capital Budgeting in the Presence of Managerial Overconfidence and Optimism, ” by the same authors. Financial support by the Rodney L. White Center for Financial Research is gratefully acknowledged. The authors would like to thank Andrew Abel,

Trading volume on the world’s markets seems high, perhaps higher than can be explained by models of rational markets. For example, the average annual turnover rate on the New York Stock Exchange (NYSE) is currently greater than 75 percent 1 and the daily trading volume of foreign-exchange transactions in all currencies (including forwards, swaps, and spot transactions) is roughly one-quarter of the total annual world trade and investment flow (James Dow and Gary Gorton, 1997). While this level of trade may seem disproportionate to investors’ rebalancing and hedging needs, we lack economic models that predict what trading volume in these market should be. In theoretical models trading volume ranges from zero (e.g., in rational expectation models without noise) to infinite (e.g., when traders dynamically hedge in the absence of trading costs). But without a model which predicts what trading volume

To explore what is the genuine utility of real economic agents, this paper raises the relatively-distinguished-hypothesis. Social beings evaluate their well-being not so much in absolute terms, but with respect to others, especially in respect to non-basicliving-demands. They are born to be differently distinguished due to differing anterior physical and social-economic conditions, e.g. different talents and different endowments, which are exogenous to them. Economic rationality, on the other side, is usually assumed to be endogenous to them and thus undistinguished. People like to keep relatively distinguished, keep not as economically rational as their less distinguished peers, so long as their basic-living-demands are well satisfied. It is the reason why so many people do not make full use of available profitable chances. And therefore, any theory of the expected utility presuming agents ’ indefinite economic rationality is doomed. Gödel's Incompleteness Theorem implies human being is never capable to completely understand himself/his talents. Consequently, his estimation of himself/his talents must