Do warning signals have a deterrent effect?
Do warning signals have a deterrent effect on the trading behavior of overconfident investors?
Will warning signals impress overconfident men more than overconfident women and to what extent?
Sample Solution
Modern financial theory relies on the rationality assumption of investors even though, evidence suggests that market investors are affected by behavioral biases such as overconfidence and disposition effect. Overconfident investors perceive situations better than what they actually are, while investors exhibiting disposition effect tend to dispose winner shares and keep loser ones. Warning signals have been shown to have a deterrent effect on the trading behavior of overconfident investors. Research suggests that these warnings can cause such investors to become more cautious and choose investments with lower risks (Kini et al., 2019). Additionally, investor confidence has also been found to decrease after receiving warning signals that highlight potential losses from previous trades (Lusardi & Tufano, 2010). These findings suggest that warning signals are effective in helping to reduce risky investing by those who may be overly confident in their decision-making abilities.
