Investigation of investors' overconfidence, familiarity and socialization


  • We would like to thank the participants at the 10th Global Finance Association, 2003, Frankfurt, Germany and the 16th Australasian Finance and Banking Conference, 2003, Sydney, Australia, two ananymous referees and the editor for their for helpful comments. All remaining errors are ours.


This study, using a sample of New Zealand investors, investigates three behavioural finance theories: investor overconfidence, socialization and the familiarity effect. We find support for the investor overconfidence theory, using characteristics such as past success, optimism, confidence in one's abilities, investment experience and investment-related knowledge. Concerning the socialization theory, we observe that the investors actively sought information regarding the stock market, 75 per cent doing this on a weekly basis. Those investors that kept themselves informed daily outperformed other investors by 8 per cent. The familiarity effect was confirmed, showing investors to hold a far too high proportion of local stocks, although the majority of investors believed international equity markets would provide returns that were either better or equal to New Zealand stocks.