Abstract
By comparing the trading behavior of individual investors in different market conditions, this paper tests the theory that attribution bias - inflated confidence in one’s own skill - creates overconfident traders. In a bull market, investors incorrectly attribute trading successes (luck) to their own abilities and therefore should be more overconfident than they are in a normal or a bear market. Consistent with this argument, we find that in a bull market investors exhibit more overconfidence indicated by the extent of excessive trading. This finding cannot be explained by alternative explanations such as disposition effect and the tendency to gamble.
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