Overconfidence TWO FAMOUS FINANCIAL ECONOMISTS INDICATIONS: high risk stocks

Investing-is a difficult process 1. Brad Barber -how it is measured:

Requirements:
-entails gathering of information
-analyzing the information
-making a decision based on that information
Overconfidence caused us to misinterpret the accuracy of our
information and overestimate our skills
-usually occurs after we have experienced success
*feel these if you experienced success: AFFIRMATION of your
BELIEF
SELF-ATTRIBUTION BIAS
-leads people to believe that successes are attributes to their own
skills and failures are attributed to a bad luck
-this can lead to a poor trading decisions which often manifest
themselves as EXCESSIVE TRADING, RISK TAKING, and
ultimately PORTFOLIO LOSSES
-Overconfidence cause the increase in the amount of trade because
it causes them to be too certain about their opinions.
TWO/ MAIN ASPECTS OF OVERCONFIDENT
1. Miscalibration
-when peoples probability distribution are too tight
-miscalibration of probabilities
-not accurately measure the answer
Most investor miscalibrate the gains & loss ( they make
predictions/ forecast)
2. Better than Average
-misinterpret to do something
-different from you can do it b/n how you can do it in a
good/best way
-ability to do a task is different to ability to a task in a
right way
*marunong kumanta sa mahilig kumanta
-unrealistic positive views of themselves
WISDOM
-combination of knowledge & experience
Knowledge
-foundation of infos.
Excess trading: men are more overconfidence in terms of trading
behavior
2. Terrance Odean RICEC VOLATILITY- degtee of ups & down of stock
:. Introduced the meaning of excessive trading price (movt)
:. They conclude that men are overconfidence over women BETA-
:. TURNOVER Beta of 1 = price of stock closely follows the price in the market
More than 1 of beta = price of stock is moving faster than the
REASONS: movt of market (high risk)
1. KNOWLEDGE Below 1 = movement is slower than the movement of market
-what if men are knowledgeable, why they are -get the closest to 1 because it is going more closer
frequently trade not just bec. they have overconfidence. New / small companies (reputation)
BARBER and ODEAN : that strategy of FREQUENT TRADING Aim : at least one/ closest possible to one
should beat BUY and HOLD STRATEGY (earnings/profit)
BUY and Hold STRATEGY basic strategy that is being bought to
practice
EXCESSIVE TRADING STRATEGY- need perfect timing
-buying stocks then selling it ( change stocks frequently)
AFTER THEY STUDY THE 2 STRATEGIES:
More than 50% of investors dont have knowledge but have an:
ILLUSION OF KNOWLEDGE=OVERCONFIDENCE
*knowledge-having that info. Needed
*wisdom- combination of knowledge & experience, how you use
knowledge
**the more you trade, the more you pay FEES
*excessive trading strategy- is only good if you have knowledge &
wisdom
*buy and hold is good for new investor w/out experience
BUY and HOLD
DISADVANTAGE:
-opportunity loss
-for other stocks that have more gain
ADV:
-less fees to be paid
-oportunity to make good advantage of stocks as it reach its peak
(PATIENCE)
-> HAVE THE PATIENCE TO ACHIEVE
Conclusion:
Theres no better strategy among the two, it depends on the
situation.
2.Risk taking

TURNOVER *RATIONAL INVESTOR-there is maximization of return while

-able to find out men frequently trade because their turnover is trying to minimize the risk (return) taken
high. *Overconfident Investor misinterpretation of risk taken
-common measure for the level of trading by looking on the -manifestations in portfolio
percentage of stocks in the portfolio that changed during the year -high risk stocks & - under DIVERSIFICATION