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Survival of Overconfidence in Currency Markets

Published online by Cambridge University Press:  06 January 2012

Thomas Oberlechner  and
Carol Osler
Thomas Oberlechner
Affiliation:
Webster University Vienna, Department of Psychology, Berchtoldgasse 1, A-1220 Vienna, Austria. oberlechner@webster.ac.at
Carol Osler
Affiliation:
Brandeis University, International Business School, Mailstop 32, 415 South St., Waltham, MA 02454. cosler@brandeis.edu
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Abstract

This paper tests the influential hypothesis that irrational traders will be driven out of financial markets by trading losses. The paper’s main finding is that overconfident currency dealers are not driven out of the market. Dealers with extensive experience are neither more nor less overconfident than their junior colleagues. We set the stage for this investigation by providing evidence that currency dealers display two forms of overconfidence: They underestimate uncertainty, and they overestimate their professional success. This is notable because one might have expected the opposite: currency dealers face strong incentives for accuracy, they have access to comprehensive information, and they have extensive experience.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 1 , February 2012 , pp. 91 - 113
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

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