The Trader Interaction Effect on the Impact of Overconfidence on Trading Performance: An Empirical Study

This article extends previous research on how overconfidence affects trading performance in two ways. First, we examine whether the degree of impact is different between an electronic trading market (as in a stock market) and an open outcry environment (as in a futures market). Second, we examine the impact of overconfidence from the perspective of miscalibration, market confidence, the better than average effect, and risk attitudes. The significant findings (5%) indicate that higher overconfidence leads to poorer trading performance generally. However, the degree of impact is higher in an open outcry environment, where there are visual, verbal, and emotional interactions between traders, than in an electronic trading environment, where a trader operates primarily in an isolated setting. Likewise, the traders who choose to trade in an open outcry environment are generally more overconfident than those who trade in a more isolated setting. The contribution of our study is therefore to highlight the importance of interactions between traders in the studies of overconfidence on trading performance. Our findings are based on the trading performance of a sample of 159 tertiary students in a simulated trading environment over six weeks.