Biased Learning Creates Overconfidence
Ni Xuanming1; Wu Chen2,3; Zhao Huimin4
AbstractThe aim of this paper is to develop a multi-period economic model to interpret how the people become overconfident by a biased learning that people tend to attribute the success to their abilities and failures to other factors. The authors suppose that the informed trader does not know the distribution of the precision of his private signal and updates his belief on the distribution of the precision of his knowledge by Bayer's rule. The informed trader can eventually recognize the value of the precision of his knowledge after an enough long time biased learning, but the value is overestimated which leads him to be overconfident. Furthermore, based on the definition on the luckier trader who succeeds the same times but has the larger variance of the knowledge, the authors find that the luckier the informed trader is, the more overconfident he will be; the smaller the biased learning factor is, the more overconfident the informed trader is. The authors also obtain a linear equilibrium which can explain some anomalies in financial markets, such as the high observed trading volume and excess volatility.
KeywordBayes' rule biased learning overconfidence
WOS Research AreaMathematics
WOS SubjectMathematics, Interdisciplinary Applications
WOS IDWOS:000452723900013
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Document Type期刊论文
Corresponding AuthorZhao Huimin
Affiliation1.Peking Univ, Sch Software & Microelect, Beijing 100871, Peoples R China
2.Chinese Acad Sci, Acad Math & Syst Sci, Beijing 100190, Peoples R China
3.Univ Chinese Acad Sci, Beijing 100049, Peoples R China
4.Sun Yat Sen Univ, Business Sch, Guangzhou 510275, Guangdong, Peoples R China
Recommended Citation
GB/T 7714
Ni Xuanming,Wu Chen,Zhao Huimin. Biased Learning Creates Overconfidence[J]. JOURNAL OF SYSTEMS SCIENCE & COMPLEXITY,2018,31(6):1603-1617.
APA Ni Xuanming,Wu Chen,&Zhao Huimin.(2018).Biased Learning Creates Overconfidence.JOURNAL OF SYSTEMS SCIENCE & COMPLEXITY,31(6),1603-1617.
MLA Ni Xuanming,et al."Biased Learning Creates Overconfidence".JOURNAL OF SYSTEMS SCIENCE & COMPLEXITY 31.6(2018):1603-1617.
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