Overconfidence bias among retail investors: A systematic review and future research directions

Abstract

This paper comprehensively evaluates the literature on retail investor overconfidence using a framework-based systematic approach to understand the various dimensions of overconfidence bias, its effect on investing choices, and market dynamics. A systematic review of 137 publications from the Scopus database have been done to detect the research trend concerning investor overconfidence bias from its inception. An integrated ADO-TCM framework has been employed to present a systematic analysis of the theory, context, and methodologies (TCM) employed in the reviewed studies. The ADO (Antecedents, Decisions, and Outcomes) framework thoroughly examines the antecedents, decisions, and results of investor overconfidence. The study identified four broad sets of factors contributing to investor overconfidence, as found in the existing literature. These factors include demographic characteristics, personality traits of investors, their knowledge and experience, and the features of investments and investor types. The Prospect theory is the most popular theory in the literature, with much research using secondary data and experiment-based analysis. The prospective study directions, based on the gaps in the existing literature, are as follows: further investigation into the decision-making processes of overconfident retail and professional investors is a worthwhile subject. Future research may shift their focus from financial outcome variables to non-financial outcome variables such as the impact of investor overconfidence on individuals’ stress levels, subjective financial well-being, and overall life happiness.