Overconfidence and emotion regulation failure: How overconfidence leads to the disposition effect in consumer investment behaviour

Abstract

Investment decisions and outcomes often entail a myriad of emotions. In this article, the authors examine overconfidence and its effect on investment behaviour. The authors show that overconfident investors tend to trade in greater volumes and exhibit stronger disposition effect. Previous research has shown disposition effect to be an outcome of loss aversion and lack of self-control, and this article shows that the disposition effect is also caused by emotions such as ‘pride’ and ‘shame’, which shows up to a greater degree in overconfident people. Overconfident consumers are prone to realize gains early, in order to feel pride and hold on to losing stocks because admitting losses creates shame. It is also shown that overconfident investors trade in greater volumes and have greater ‘illusion of control’.