Does Good Luck Make People Overconfident? Evidence from a Natural Experiment in China

Abstract

This paper examines the changes in households’ trading behavior after winning an IPO allotment in China—a purely luck-driven event. We find that these households subsequently become overconfident: they trade more frequently and lose more money relative to other households. This effect is stronger when households are inexperienced and when households’ pre-existing level of overconfidence is low. Our findings are not explained by wealth effects or house money effects. Overall, our evidence indicates that the experience of good luck makes people overconfident about their prospects.