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What the research says

What overconfidence costs a trader

35,000 households, split by expected confidence. The more confident group traded 45 percent more and gave up nearly a point more a year for it.

Updated 26 August 2026

Overconfidence is hard to study, because nobody fills in a form saying they think they know more than they do. So two researchers found a way to split a large group of real traders into a more confident half and a less confident half without asking anyone anything.

The experiment

Barber and Odean used "account data for over 35,000 households from a large discount brokerage" covering February 1991 to January 1997. They split the accounts by gender, on the basis that psychological research already showed men are more overconfident than women when it comes to finance [1].

The prediction was simple. If overconfidence causes people to trade too much, the group expected to be more overconfident should trade more, and should do worse for it.

What they found

Both halves of the prediction held. "We document that men trade 45 percent more than women. Trading reduces men's net returns by 2.65 percentage points a year as opposed to 1.72 percentage points for women" [1].

Read the second sentence carefully, because it is the one that matters and it is easy to skim past. Trading reduced returns for both groups. Nobody came out ahead by trading. The confident group just lost more of it.

Why confidence turns into cost

Believing you have an edge makes you act on more of your ideas. More ideas acted on means more trades, and every trade pays a spread whether it works or not. That is the whole mechanism, and it does not require any of your ideas to be bad.

The uncomfortable part is that confidence feels like information. It arrives as a sense that this one is different, that you can see something here. It is not distinguishable, from the inside, from actually being right.

Which is why the only real defence is a record. Not how sure you felt, but what happened. Confidence is not measurable and results are.

Sources

  1. Barber, B. M. and Odean, T., "Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment", The Quarterly Journal of Economics, vol. 116, no. 1, 2001, pp. 261 to 292. https://academic.oup.com/qje/article/116/1/261/1939000

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