CHAPTER 9: Discussion Questions and Problems
1. Differentiate the following terms/concepts:
a. Indirect and direct tests of relationship between overconfidence and
trading activity
b. Sensation seeking and overconfidence
Overconfidence in its various manifestations has been extensively discussed in the
c. Underdiversification and excessive trading
d. Statics and dynamics of overconfidence
2. Consider two investors (A and B) with the following demand curves for a
stock:
A: p = 100 – q
B: p = 150 – 2q
a. At a price of $50, how much will A and B purchase?
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b. If the price falls to $30, who will increase their holdings more? Explain.
c. On this basis, which investor seems to more overconfident?
3. Discuss what the evidence (using naturally-occurring data, survey data,
and experimental data) suggests about the relationship among overconfidence,
trading activity, and portfolio performance.
4. What evidence is there that people do not diversify enough? Why is it
that this occurs? What is the simplest way to “buy” a high level of diversification
in an equity portfolio?
In one study 3,000 U.S. individual portfolios were examined. Most held no stock at all.
Of those households which did hold stock (more than 600), it was found that the median
5. Research indicates that stock market forecasters are also overconfident.
Do they learn from their mistakes? Discuss.
In one study, the forecasts of a group of German market practitioners were examined.
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