Overconfident Individual Day Traders: Evidence from a Natural Experiment

Abstract

We take advantage of a natural experiment in the Taiwan futures market to investigate the overconfident behavior and the performance of day traders. Since October 2007, investors can commit to be literally “day traders”to enjoy halved margin deposit by closing the day-trade position on the same day. This ex ante nature provides us a laboratory without potential biases from other trading motivations and disposition effect. The result shows that the 3,470 individual day traders on average make a significantly loss of 61.5 (26.7) thousand New Taiwan dollars after (before) transaction costs. This implies that these day traders are not only overconfident in precision of information but also having biased interpretation of information. We also find that trading is hazardous to the overconfident losers, but not to the winners. Last, the evidence suggests that more experienced individual investors exhibit more aggressive day trading behavior. But these experienced day traders do not learn their types or gain superior trading skills, which could alleviate the losses brought by the behavior bias.