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Investor memory of past performance is positively biased and predicts overconfidence.

ABSTRACT: We document a memory-based mechanism associated with investor overconfidence. In Studies 1 and 2, investors were asked to recall their most important trades in the recent past and then reported investing confidence and trading frequency. After the study, they looked up and reported the actual returns of these trades. In both studies, investors were biased to recall returns as higher than achieved, and larger memory biases were associated with greater overconfidence and trading frequency. The design of Study 2 allowed us to separately investigate the effects of two types of memory biases: distortion and selective forgetting. Both types of bias were present and were independently associated with overconfidence and trading frequency. Study 3 was an incentive-compatible experiment in which overconfidence and trading frequency were reduced when participants looked up previous consequential trades compared to when they reported them from memory.

SUBMITTER: Walters DJ

PROVIDER: S-EPMC8433511 | biostudies-literature | 2021 Sep

REPOSITORIES: biostudies-literature

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Investor memory of past performance is positively biased and predicts overconfidence.

Walters Daniel J DJ Fernbach Philip M PM

Proceedings of the National Academy of Sciences of the United States of America 20210901 36

We document a memory-based mechanism associated with investor overconfidence. In Studies 1 and 2, investors were asked to recall their most important trades in the recent past and then reported investing confidence and trading frequency. After the study, they looked up and reported the actual returns of these trades. In both studies, investors were biased to recall returns as higher than achieved, and larger memory biases were associated with greater overconfidence and trading frequency. The des ...[more]

PMID: 34475206

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Investor memory of past performance is positively biased and predicts overconfidence.

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Investor memory of past performance is positively biased and predicts overconfidence.

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