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Overconfident Investors Essay

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Below is an essay on "Overconfident Investors" from Anti Essays, your source for research papers, essays, and term paper examples.

Many people feel like they are above being the victim of major catastrophe.   They feel that luck is on their side and the awful things that happen to others would never happen to them and have little regard to the concept of risk aversion.   Risk aversion is the reluctance of a person to accept a bargain with an uncertain payoff rather than another bargain with more certain, but possibly lower, expected payoff.   Many younger investors who have not lived through turbulent eras, such as, the Depression are more likely to accept higher risk expecting higher returns and ignore the downside of potentially losing everything, versus a safe investment that will guarantee a lower level gain.   Overconfident investors tend to be run high risk through excessive trading, familiarity, and faulty diversification.
        Investors who trade excessively can be playing a dangerous game.   Overconfidence increases trading because it causes you to be too certain about your opinions. As an overconfident investor you believe the accuracy of the information that you are receiving and in your ability to interpret it. You believe more strongly in your own valuation of a stock and concern yourself less about the beliefs of others.   In Odean and Barber's landmark study of 78,000 individual investors' accounts at a large discount brokerage from 1991-1996, the average annual turnover was 80%.   The least active quintile, with average annual turnover of 1%, had 17.5% annual returns, beating the S&P, which was up 16.9% annually during this period. But the most active 20% of investors, with average turnover of more than 9% monthly, had pre-tax returns of 10% annually. The authors of the study rightly conclude that "trading is hazardous to your wealth." Incidentally, I suspect that the number of hyperactive traders has increased dramatically, given the number of investors flocking to online brokers. Odean and Barber have done another fascinating study showing that investors who switch to online...

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