Dissertation
Improving investors' judgments with market benchmarks
University of Iowa
Doctor of Philosophy (PhD), University of Iowa
Summer 2023
DOI: 10.25820/etd.007032
Abstract
Personal portfolio returns conflate overall market returns and abnormal returns. I use an experiment to disentangle when past market returns cause individual investors to become overconfident and test whether a salient market benchmark reduces overconfidence and improves investors’ judgments. Participants are experienced investors who make simulated trades on a virtual stock exchange and estimate their future relative investing performance. I document that positive past market returns lead investors to become more overconfident. I also find that presenting investors with a salient market benchmark mitigates this effect and helps investors make judgments consistent with prescriptive investing advice. Thus, my findings suggest salient market benchmarks can serve as a relatively simple and implementable visual cue that can reduce investor overconfidence and its adverse consequences. My findings address concerns among regulators about how to best protect investors and contribute to growing research in accounting on the judgments and behaviors of individual investors in capital markets.
Details
- Title: Subtitle
- Improving investors' judgments with market benchmarks
- Creators
- Cory Hinds
- Contributors
- Scott Asay (Advisor)Dain Donelson (Committee Member)Michael Durney (Committee Member)Cristi Gleason (Committee Member)Paul Hribar (Committee Member)
- Resource Type
- Dissertation
- Degree Awarded
- Doctor of Philosophy (PhD), University of Iowa
- Degree in
- Business Administration (Accounting)
- Date degree season
- Summer 2023
- Publisher
- University of Iowa
- DOI
- 10.25820/etd.007032
- Number of pages
- ix, 56 pages
- Copyright
- Copyright 2023 Cory Hinds
- Language
- English
- Date submitted
- 06/13/2023
- Description illustrations
- illustrations, tables, graphs
- Description bibliographic
- Includes bibliographical references (pages 33-38).
- Public Abstract (ETD)
- The investment returns earned by individual investors are the result of personal ability and luck. Psychology research finds that individuals tend to attribute past success to personal ability and discount the effect of luck. As a result, if past investing success is driven by factors other than personal ability, investors may become overconfident and make poor investing judgments in the future. In this paper, I study the effects of overall market conditions on investor overconfidence, and test whether highlighting overall market performance reduces investor overconfidence and improves their investing judgments. Using a randomized, controlled experiment, I find that investors become more overconfident when they trade during periods of higher overall market returns, suggesting that they discount the effect of the overall market on their investing returns. I also find that highlighting overall market performance helps investors avoid overconfidence and its potentially harmful effects on their future judgments. My findings may be of interest to regulators who are tasked with protecting investors and providing them with tools to aid their investing decisions.
- Academic Unit
- Tippie College of Business
- Record Identifier
- 9984454644002771
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