Countering Over-Confidence and Over-Optimism By Creating Awareness and Experiential Learning Amongst Stock Market Players

Abstract

This paper explores the effects of the over-confidence and over-optimism biases in the stock markets. These biases strike at the root of why people trade and often, why people incur losses on the stock market. It suggests legal and other responses that would mitigate these biases. In Part I, the author elaborates on the meaning and presence of the over-confidence and over-optimism biases amongst players in the stock markets and notes their continued presence amongst investors. In Part II, the author observes the key effects of these biases and estimates the economic costs incurred as a result of these biases. She concludes that they are substantially high and recommends efforts to minimize these biases amongst investors in the stock markets. In Part III, the author explores ways in which legal policy can help limit these biases effectively.