Does Overconfidence Harm Individual Investors? An Empirical Analysis of the Taiwanese Market


Corresponding author: Chi Ming Ho, Department of Finance, Southern Taiwan University, No. 1 Nan Tai Street, Yong Kang City, Tainan County, Taiwan. Tel: +886-6-2533131, Fax: +886-6-3010006, email:;


This article uses the approaches of (Journal of Finance 53, 1998, 1775) and (The Review of Financial Studies 19, 2006, 1531) to study the influence of overconfidence on the trading behavior of investors based on the accounts of 1185 individual investors in the Taiwan market. In addition, private information, interaction effect, and credit are treated in the analysis to establish a model of psychological bias and trading behaviors. To prevent the effects of the subprime mortgage crisis on the stock market from affecting our dataset, the study period is set from January to September 2010; the data frequency is monthly so that complete economic cycles are included. Robustness analyses such as Newey–West and nonlinear regression reveal several important findings. First, Taiwanese traders exhibit the disposition effect, especially under bear market conditions. Second, on the cross-section, a more overconfident investor tends to show a higher degree of the disposition effect. Third, overconfident traders prefer to invest in small cap stocks. Fourth, leveraged, overconfident traders with private information eventually hold losers too long.