Abstract
We build a strategic trading model where the overconfident trader earns more than the rational trader and the mechanism for this result differs from that of Kyle and Wang (1997). In this paper, discretionary and nondiscretionary liquidity traders coexist. The overconfident insider is less worried by the market maker and thus induces a lower liquidity cost. In this way, he attracts all the trading from the discretionary liquidity traders, which enables the survival of the overconfident trader.
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