Overconfidence and Market Performance

How does trader overconfidence (overprecision or overplacement) affect individual performance in asset markets, and overall market quality? Conversely, how does market participation affect traders’ overconfidence? We build a laboratory asset market in which human participants receive private information of varying precision and then trade an asset that pays a single state-contingent dividend. We find that greater trader overconfidence can improve price efficiency in some environments, but not in the most realistic environment with experienced traders and ambiguous mixed information precision. In that environment, overconfidence reduces trader profits. We detect no substantial impact of market participation on trader overconfidence.