Stock market experience and investor overconfidence: Do investors learn to be overconfident?

Abstract

Investor overconfidence, characterized by an excessive belief in the ability to generate superior portfolio returns, is a widely studied behavioral bias. This paper investigates the mechanisms underlying overconfidence using a Bayesian model that incorporates two features: biased prior beliefs, which imply overconfidence even before investors engage in the stock market, and biased learning, where investors overemphasize instances of outperforming the market. Empirical analysis supports the hypothesis that biased learning contributes to overconfidence, but only in the early years of investor tenure. Although overconfidence decreases with investment experience, we find that it is a widespread and persistent behavioral trait.