LEARNING TO BE OVERCONFIDENT AND UNDERCONFIDENT

This paper analyzes the overconfident and underconfident trading behavior simultaneously in the context extended from Gervais and Odean (2001) [Learning to be overconfident. Review of Financial Studies, 14(1), 1-27]. We find that the overconfidence level will be first decreasing, then increasing and finally decreasing as the number of the successful predictions increases when the underconfident behavior is sufficiently prominent and the expected trading volume in the future will first decrease then increase and finally decrease as the number of successes increases. Furthermore, the insider's expected profits in the future are a monotonically increasing function of the number of successes when the number of successes is sufficiently small or large but monotonically decreasing function of this number when it is in the intermediate range. This completes the analysis of the investors' biased behavior.

Automated summary

This paper simultaneously analyzes the overconfident and underconfident trading behavior and finds that the level of overconfidence decreases, then increases, and finally decreases again as the number of successful predictions increases when the underconfident behavior is prominent. The expected trading volume in the future first decreases, then increases, and finally decreases as the number of successes increases. Furthermore, the insider's expected profits in the future increase monotonically with the number of successes when it is either small or large, but decrease monotonically when it is in the intermediate range. This completes the analysis of investors' biased behavior.