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INTRODUCTION
Individual investment behaviour has recently attracted a great deal of attention from researchers in the fields of economics, psychology and marketing. Stock investment is one of the most important decision-making areas for the lay investor, as consequences of a good or a bad decision can be considerable. Moreover, investors are not free from psychological biases such as overconfidence and loss aversion in their investment decision-making processes (see for example Stracca, 2004), and these powerful biases often hinder sound investment behaviour. It has been shown that overconfidence is a common trait among many investors, and experts and novices alike are affected by it (Griffin and Tversky, 1992; Zaleskiewicz, 2011). Some observers have even attributed the global financial crisis to the all-too-human skill of creating overly optimistic forecasts ( Onwallstreet , 2008).
Social scientists agree that there is a motivation in us to master our environment and to 'beat the odds' (Langer, 1975), even though the phrase is an oxymoron. Nevertheless, people will continue to attempt at controlling chance events. Further, it has been shown paradoxically that more difficult problems elicit greater feelings of confidence in being able to solve them (Langer, 1975). The greatest satisfaction would therefore result from being able to control the seemingly uncontrollable. Researchers find that tasks that are likely to give rise to overconfidence are those that are purely random, personally important (Frank, 1935), difficult (Odean, 1998) and require a high level of involvement (Langer, 1975). In many ways, stock investment corresponds to these characteristics, as it is unpredictable, uncontrollable, complex and difficult. Thus, individuals may more easily fall into overconfidence bias in stock investment compared to other areas.
Prior research shows that overconfident investors have a tendency to overestimate the quality of their investment information and their ability to interpret it. This tendency results in increased frequent trading and volumes (for example, Barber and Odean, 2000), which causes poor performance. In this article, we examine how overconfidence leads to the disposition effect . The disposition effect, the tendency to hold on to losing stocks and to sell winning stocks, has been identified as one of the principal causes of poor investment performance (Shefrin and Statman, 1985; Odean, 1998; Shapira and Venezia, 2001; Dhar and Zhu, 2006). The disposition effect...