BOYSWILLBEBOYS:GENDER,OVERCONFIDENCE ...

1 BOYSWILLBE BOYS:GENDER,OVERCONFIDENCE,ANDCOMMONSTOC KINVESTMENT*BRADM. BARBERANDTERRANCEODEANT heoreticalmodelspredictthat overcon this predictionby partitioninginvestorson ,in areassuchas nance,menare moreovercon ,theorypredictsthatmenwill over35,000householdsfroma largediscountbrokerage,we analyzethe commonstockinvestmentsof menand documentthatmentrade45 s net returnsby yearasopposedto s not whata mandon t knowthat makeshim a fool, but whathe doesknowthatain t ,nineteenthcenturyAmericanhumoristIt is dif cult to reconcilethe volumeof tradingobservedinequitymarketswiththe tradingneedsof ,rebalancetheirportfolios,andtradeto superiorinfor-mationmaytradespeculativel y,althoughrationalspeculativetraderswill generallynot chooseto isunlikelythat rationaltradingneedsaccountfor a turnoverrate of76 percenton the NewYorkStockExchangein believethereis a simpleand powerfulexplanationforhighlevelsof tradingon nancialmarkets:overcon overcon dentabouttheirabilities,theirknowl-edge, and [1998]showsthatover-con dentinvestors whobelievethatthe precisionof theirknowledgeaboutthe valueof a securityis greaterthanit actually* We are gratefulto the discountbrokerage rm thatprovidedus withthedatafor this studyand gratefulto PaulThomas,DavidMoore,PaineWebber,andthe GallupOrganizationfor appreciatethe commentsof DianeDel Guercio,DavidHirshleifer,AndrewKarolyi,T imothyLoughran,EdwardOptonJr.

2 , SylvesterSchieber,AndreiShleifer,MarthaS tarr-McCluer,RichardThaler,LuisViceira,a ndparticipantsat the Universityof Alberta,ArizonaStateUniversity,INSEAD,th e LondonBusinessSchool,the UniversityofMichigan,the Universityof Vienna,the Instituteon Psychologyand Markets,theConferenceon HouseholdPortfolioDecision-makingand AssetHoldingsat theUniversityof Pennsylvania,and the our reachedat (530)752-5332orodean] ;BradBarbercanbe reachedat (530)752-0512orbmbarber] NYSEFactBookfor the Year1999. 2001by the Presidentand Fellowsof HarvardCollegeand the QuarterlyJournalof Economics,February2001261is trademorethanrationalinvestorsand thatdoingso denceleadsto greatertradingand to directtest of whetherovercon dencecontributesto exces-sive markettradingis to separateinvestorsinto thosemoreandthoseless proneto overcon thentest whethermoreovercon denceleadsto moretradingand to test is the primarycontributionof this nd that in areassuchas nancemenare moreovercon overcon denceyieldstwo predictions.

3 Menwill trademorethanwomen,and theperformanceof menwill be hurtmoreby excessivetradingthanthe performanceof test thesehypotheses,we partitiona dataset of positionand tradingrecordsfor over35,000house-holdsat a largediscountbrokerage rm into accountsopenedbymenand accountsopenedby predic-tionsof the overcon dencemodels,we nd thatthe averageturnoverrateof commonstocksfor menis nearlyone and a halftimesthatfor womenreducetheirnet returnsthroughtrading,mendo so by yearthando differencesin turnoverand returnperformanceare evenmorepronouncedbetweensinglemenand percentmorethansinglewomentherebyreducin gtheirreturnsby thispaperis organizedas test of overcon dencein SectionI. We discussourdataand empiricalmethodsin SectionII. Ourmainresultsarepresentedin SectionIII. We discusscompetingexplanationsfor our resultsin SectionIV A Overcon denceand Tradingon FinancialMarketsStudiesof the calibrationof subjectiveprobabilities nd thatpeopletendto overestimatethe precisionof theirknowledge[AlpertandRaiffa1982;Fisch hoff,Slovic,andLichtenstein1977];see Lichtenstein,Fischhoff,and Phillips[1982]for a re-viewof the dencehas been262 QUARTERLYJOURNALOF ECONOMICS observedin manyprofessional [Os-kamp1965],physiciansand nurses[Christensen-SzalanskiandBushyhead 1981.]

4 Baumann,Deber,and Thompson1991],invest-mentbankers[Stae l von Holstein1972],engineers[Kidd1970],entrep reneurs[Cooper,Woo,andDunkelberg1988],la wyers[Wagenaarand Keren1986],negotiators[Nealeand Bazerman1990],and managers[Russoand Schoemaker1992]haveall beenobservedto exhibitovercon dencein theirjudgments.(Forfur-therdiscussionsee Lichtenstein,Fischhoff,and Phillips[1982]and Yates[1990].)Overcon denceis greatestfor dif culttasks,for forecastswithlow predictability,and for undertakingslackingfast,clearfeedback[Fi schhoff,Slovic,and Lichtenstein1977;Lichtenstein,Fischhoff, andPhillips1982;Yates1990;Grif n andTversky1992].Selectingcommonstockstha twill outperformthe marketis a dif cult low;feedbackis ,stockselectionis the typeof taskfor whichpeopleare mostovercon [1998]developsmodelsin whichovercon dentinves-torsoverestimatethe precisionof theirknowledgeaboutthevalueof a probabilitythattheirpersonalassessmentso f the security s valueare moreaccuratethanthe assessmentsof ,overcon dentinvestorsbelievemorestronglyin theirownvaluations,andconcernthemselvesl ess aboutthe beliefsof es differencesof opinioncausetrad-ing [Varian1989;Harrisand Raviv1993].

5 Rationalinvestorsonlytradeandonlypurchas einformationwhendoingso increasestheirexpectedutility( ,Grossmanand Stiglitz[1980]).Over-con dentinvestors,on the otherhand,lowertheirexpectedutil-ity by tradingtoo much;theyholdunrealisticbeliefsabouthowh ightheirreturnswill be and howpreciselythesecan be esti-mated;andtheyexpendtoo manyresources( ,timeandmoney)on investmentinformation[Odean1998].Overcon dent2. Othermodelsof overcon dentinvestorsincludeDe Long,Shleifer,Sum-mers,and Waldmann[1991],Benos[1998],Kyleand Wang[1997],Daniel,Hirsh-leifer,andSubram anyam[1998],GervaisandOdean[1998],andCab alle andSa kovics[1998].Kyleand Wangarguethatwhentraderscompetefor duopolypro ts, overcon denttradersmayreapgreaterpro ts. However,this predictionisbasedon severalassumptionsthatdo not applyto [1998]pointsout thatovercon dencemayresultfrominvestorsover-estimati ngthe precisionof theirprivatesignalsor, alternatively,overestimatingtheirabiliti esto BOYS investorsalsoholdriskierportfoliosthando rationalinvestorswiththe samedegreeof risk aversion[Odean1998].

6 BarberandOdean[2000]andOdean[1999]testwh etherinvestorsdecreasetheirexpectedutili tyby tradingtoo samedataanalyzedin this paper,Barberand Odeanshowthatafteraccountingfor tradingcosts, mostrealize,by far, the whatthe modelsofovercon differentdataset, Odean[1999] nds thatthe securitiesindividualinvestorsbuy controlsfor li-quiditydemands,tax-lossselling,rebala ncing,andchangesinriskaversion,investors timingof tradesis not onlyare investorstoo willingto act on toolittleinformation,but theyare too willingto act investorstradetoo muchandto ndingsare inconsistentwithrationalityand not easilyexplainedin the absenceof overcon ,overcon denceis neitherdirectlyobservednor manip-ulatedin yet sharpertestof the modelsthatincorporateovercon denceis to partitioninvestorsintothosemoreand thoseless proneto overcon modelspredictthatthe moreovercon dentinvestorswill trademoreand test thesepredictions,we partitionourdataon Genderand Overcon denceWhilebothmenand womenexhibitovercon dence,menaregenerallymoreovercon dentthanwomen[Lundeberg,Fox.]

7 AndPunc ochar 1994].3 Genderdifferencesin overcon dencearehighlytaskdependent[Lundeberg,Fo x,and Punc ochar 1994].Deauxand Farris[1977]write Overall,menclaimmoreabilitythando women,but this differenceemergesmoststronglyon ..masculinetask[s]. Severalstudiescon rm thatdifferencesincon denceare greatestfor tasksperceivedto be in the masculinedomain[DeauxandEmswiller1974;Le nney1977;BeyerandBowden1997].Menare inclinedto feel morecompetentthan3. WhileLichtensteinand Fishhoff[1981]do not nd genderdifferencesincalibrationof generalknowledge,Lundeberg,Fox,and Punc ochar [1994]arguethat this is becausegenderdifferencesin calibrationare strongestfor topicsin ECONOMICS womendo in nancialmatters[Prince1993].Indeed,casual ob-servationrevealsthatmenare disproportionatelyrepresentedinthe expect,therefore,thatmenwill gen-erallybe moreovercon dentabouttheirabilityto make ,Lenney[1977]reportsthatgenderdifference sin self-con dencedependon the lackof clearand unequivocaland immediatelyavail-able,womendo not ,whensuchfeedbackis absentor ambiguous,womenseemto haveloweropinionsof theirabilitiesand oftendo under-estimaterelativeto men.

8 Feedbackin the stockmarketis the morereasonto expectmento be morecon dentthanwomenabouttheirabilityto Odean[1998]developa modelin whichinvestorovercon in this modelinfertheirownabilitiesfromtheirsucc essesand theirtendencyto taketoo muchcreditfortheirsuccesses,theybecomeov ercon [1977],Meehanand Overton[1986],and Beyer[1990] nd thatthe self-servingattributionbiasis greaterfor so menare likelyto becomemoreovercon previousstudymostlike our own is Lewellen,Lease,andSchlarbaum s [1977]analysisof surveyanswersand brokeragerecords(from1964through1970)of 972 ,Lease,and Schlarbaum s reportthatmenspendmoretimeand moneyon securityanalysis,rely less on theirbrokers,makemoretransactions,believ ethatreturnsare morehighlypredictable, all theseways,menbehavemorelike overcon dentinvestorsthando moreovercon dentinves-torsthanwomencomesfromsurveysc onductedby the GallupOrganizationfor survey f-teentimesbetweenJune1998and additionto otherquestions,respondentswereasked Whatoverallrateof returndo youexpectto get on yourportfolioin the NEXT twelvemonths?

9 And Thinkingaboutthe stockmarketmoregenerally,whatoverallrate of returndo you thinkthe stockmarketwill265 BOYSWILLBE BOYS provideinvestorsduringthe comingtwelvemonths? On average,bothmenand womenexpectedtheirown portfoliosto outperformthe ,menexpectedto outperformby a greatermargin( percent)thandid women( percent).The differencein the averageanticipatedoutperformanceof menand womenisstatisticallysigni cant(t=3. 3).4In summary,we havea naturalexperimentto (almost)di-rectlytest theoreticalmodelsof investorovercon ratio-nal investoronlytradesif the expectedgainexceedsthe overcon dentinvestoroverestimatesthe precisionof his informationand therebythe expectedgainsof true expectednet gainis moreovercon dentthanwomen,this givesus two test-ablehypotheses:H1: : By tradingmore, is thesetwo hypothesesthatare the focusof our DemographicDataOur mainresultsfocuson the commonstockinvestmentsof37,664households for whichwe are ableto identifythe genderofthe personwhoopenedthe household s rst compiledfromtwo is informationfroma largediscountbrokerage rm on the investmentsof 78,000householdsfor the sixyearsendingin this period,we haveend-of-monthpositionstatementsand tradesthatallowus to reasonablyestimatemonthlyreturnsfromFebr uary1991throughJanuary4.

10 Somerespondentsansweredthat theyexpectedmarketreturnsas highas900. We suspectthat theserespondentswerethinkingof ,we havedroppedfromour calculationsre-spondentswho gaveanswersof morethan100 to this , alternatively,we Windsorizeanswersover900 at 100 thereis no signi cantchangein Overcon dencemodelsalso implythatmoreovercon SectionIII we ,genderdifferencesin portfolioriskmaybe due to differencesin risktoleranceratherthan(or in additionto)differencesin overcon dataset includesall accountsopenedby the 78,000house-holdsat this discountbrokerage rm. Sampledhouseholdswererequiredto havean openaccountwiththe discountbrokerage the accountsin our analysiswereopenedpriorto 1987,whilehalf average,menopenedtheir rst accountat this yearsbeforethe beginningof our sampleperiod, sampleperiod,men saccountsheldcommonstocksfor 58 monthson averageand wom-en s for 59 mediannumberof monthsmenheldcom-monstocksis 70.