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    Overconfidence, Overreaction and Personality

    Access Status
    Fulltext not available
    Authors
    Durand, Robert
    Newby, R.
    Tant, K.
    Trepongkaruna, S.
    Date
    2013
    Type
    Journal Article
    
    Metadata
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    Citation
    Durand, R. and Newby, R. and Tant, K. and Trepongkaruna, S. 2013. Overconfidence, Overreaction and Personality. Review of Behavioral Finance. 5 (2): pp. 104-133.
    Source Title
    Review of Behavioral Finance
    ISSN
    1940-5979
    School
    School of Economics and Finance
    URI
    http://hdl.handle.net/20.500.11937/49010
    Collection
    • Curtin Research Publications
    Abstract

    Purpose – The purpose of this paper is to systematically profile investors’ personality traits toexamine if, and how, those traits are associated with phenomena observed in financial markets. Inparticular, the paper looks at overconfidence and overreaction in an experimental foreign exchangemarket.Design/methodology/approach – The paper measures the personality of the subjects using theshort form of the NEO-PIR instrument, the NEO-FFI developed by Costa and McRae (1992) which is based on Norman’s (1963) “Big Five” personality constructs of negative emotion, extraversion,openness to experience, agreeableness and conscientiousness. The paper measures psychological gender using questions developed by Bem (1994). Preference for innovation and risk-taking propensity are measured using instruments developed by Jackson (1976). The paper then examines the behavior of the subject who traded interactively in “real time” in an interactive-simulated foreign exchange market where “price discovery” was instantaneous and pricing decisions were made instantaneously as items of news, determined by the researchers, were released.Findings – The paper demonstrates that personality traits are associated with overconfidence andoverreaction in financial markets. The paper presents meta-analysis which facilitates the development of a posteriori theories of how particular traits affect investment; there are important roles for risktaking propensity, negative emotion, extraversion, masculinity, preference for innovation andconscientiousness.Originality/value – A typical behavioral finance paper might find an empirical regularity in pricesand, on the basis of such patterns, infer the underlying psychology motivating the behaviorof investors. The approach differs from this caricature of the “typical” behavioral finance paper.The paper does not infer the underlying psychology of investors from patterns in prices. Rather, thepaper learns about investors by systematically profiling their personality traits. The paper thendemonstrates how those traits are associated with the prices generated by the investors the authorsstudy. In focussing on the role of individual personality, the paper refocusses behavioral finance on the individuals who set prices.

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