On the survival of overcon"dent traders in a competitive securities marketq

Recent research has proposed several ways in which overcon"dent traders can persist in competition with rational traders. This paper o!ers an additional reason: overcon"-dent traders do better than purely rational traders at exploiting mispricing caused by liquidity or noise traders. We examine both the static pro"tability of overcon"dent versus rational trading strategies, and the dynamic evolution of a population of overcon"dent, rational and noise traders. Replication of overcon"dent and rational types is assumed to be increasing in the recent pro"tability of their strategies. The main result is that the long-run steady-state equilibrium always involves overcon"dent traders as a substantia