Overconfident Individual Day Traders: Evidence from Taiwan Futures Market

We take advantage of a day-trading policy implementation in Taiwan futures market to investigate the performance of day traders. Since October 2007, investors can commit to be “day traders ” by closing the day-trade position on the same day to enjoy 50 % deduction for the initial margin. This ex ante nature provides us a laboratory to explore their trading behavior without potential biases from other trading mo-tivations and disposition effect. The result shows that the 3,470 individual day traders on average make a significantly loss of 61.5 (26.7) thousand New Taiwan dollars after (before) transaction costs from October 2007 to September 2008. This implies that those day traders are not only overconfident in precision of in-formation but also having biased interpretation of information. We also find that trading is only hazardous to the overconfident losers, but not to the winners. Last, the evidence suggests that more experienced in-dividual investors exhibit more aggressive day trading behavior. But these experienced day traders do not learn their types or gain superior trading skills, which could mitigate the losses due to overconfidence