Investor Confidence and Reaction to a Stock Market Crash

This paper explores how investor overconfidence impacts reactions to stock market crashes. Using the 2018 Investor Survey dataset from FINRA we measure respondent's self-perceived and actual investment knowledge and thus are able to identify overconfident investors from other investors. In our analysis, we find overconfident investors were significantly more likely to sell after a stock market crash than other investors, and thus more likely to lock-in the losses from the crash and miss subsequent upswings in the market. Moreover, these overconfident investors were significantly more likely than other investors to pursue risky investment strategies such as cryptocurrencies, margin accounts, options, and penny stocks that can also lead to large losses. Finally, we find that accurately aware investors, investors who have both high perceived and actual knowledge, buy significantly more after a crash.