Is Overconfidence a Risk Factor for Excessive Trading?

Gambling and trading involve similar risks and can be practiced excessively. No study has addressed cognitive distortions in excessive trading during decision-making in experimental task, though the illusion of control is well established in gambling. Overconfidence, closely related to the illusion of control, may be a cognitive factor in excessive trading. Overconfidence is a construct including overestimation, overplacement and overprecision. This study investigated the relationship between overconfidence in simulated financial decision-making involving technical analysis and the likelihood of excessive trading among individual investors. Seventy individual investors (N = 70), who traded at least once the two weeks prior to recruitment and used technical analysis for most of their trade, took part in a simulated trading task involving technical analysis during which overestimation and overplacement were assessed. Excessive trading was assessed using the Problem Gambling Severity Index adapted for trading. Results from logistic regression show that overestimation, but not overplacement, distinguishes individual investors with no-to-low risk of excessive trading from those at moderate-to-high risk. The more individual investors of our sample tended to overestimate their performance in a simulated trading task involving technical analysis the more likely they were to show moderate-to-high risk of excessive trading. These results are coherent with observations made in problem gamblers, indicating that the risk of problem gambling increases with the degree of belief in cognitive distortions. The discussion includes potential adaptations of the overplacement measure and the decision-making tasks, with consideration for potential variables to further grow knowledge of risk factors of excessive trading.