Overconfidence in Market Timing or Security Selection

Individual investors that are also natural persons play an important role in the stock market as providers of liquidity, and it is their investment performance that directly influences their rate of survival in the market. As to whether the outcome of their operating performance is due to their overconfidence, and whether this in turn influences their survival in the market, forms the basis of this study. To this end, we use data for each investor's credit transactions in the Taiwan securities market in an attempt to verify whether the investors' overconfident trading behavior that gives rise to wealth losses through short selling is reflected in their competence in picking stocks, as opposed to their ability to time their participation in the market as suggested by Barber and Odean (2000). We find that a threshold effect exists between the number of trade stocks of short-selling traders and their returns, that is, when the number of trade stocks is lower than the threshold value, the number of trade stocks and the return exhibits a positive relationship. However, when the number of trade stocks is higher than the specified threshold value, the relationship with the returns will be negative. However, regardless of how large the number of trade stocks is, the trade frequencies will always be positively related to the return. The results of our empirical analysis indicate that the main reason for the loss of wealth on the part of short-selling investors is their excessive number of trade stocks, and not the frequency of trades. In addition, we also find that day traders engaging in credit transactions are characterized by a significant disposition effect (i.e., a reluctance to realize losses), and investors are more inclined to be overconfident when engaging in credit transactions than when trading in common stocks