Can Investing Diaries be Hazardous to Your Financial Health?
| Autor: | Thomas S. Gruca, Michael Cipriano, Jennie Jiao |
|---|---|
| Rok vydání: | 2020 |
| Předmět: |
010407 polymers
Actuarial science media_common.quotation_subject Psychological research Market efficiency Behavioral economics 01 natural sciences Financial health 0104 chemical sciences 03 medical and health sciences 0302 clinical medicine Confirmation bias 030220 oncology & carcinogenesis Economics Hindsight bias Stock (geology) media_common Overconfidence effect |
| Zdroj: | The Journal of Prediction Markets. 14:105-125 |
| ISSN: | 1750-676X 1750-6751 |
| Popis: | Business writers and academics have suggested keeping an investing diary to avoid hindsight bias. In the diary, investors justify their predictions of future events, e.g., “This stock will go up because…” Eliminating hindsight bias should improve future returns. However, psychological research on the “explanation effect” suggests that justifying one’s predictions in writing induces overconfidence and, by consequence, reduces current returns. We test these propositions in a set of prediction markets populated by two types of traders: forecasters who completed a required investing diary task and non-forecasters who did not. The portfolios of forecasters were significantly over-invested in securities associated with the forecaster’s prediction. This is consistent with prior psychological research and a clear sign of investor over-confidence. We further find that forecasters with accurate predictions have higher returns than those with inaccurate predictions. However, the returns for forecasters with inaccurate predictions were generally no worse than the returns of the non-forecasters. Our results suggest that while keeping an investing diary may lead to biased portfolios, it does not have an overall negative effect on current returns. Therefore, contrary to expectations, there is not a trade-off between the long-term and short-term effects of an investing diary. |
| Databáze: | OpenAIRE |
| Externí odkaz: |
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