Information, overconfidence and trading: Do the sources of information matter?

We investigate how the strength of the positive association between frequency of trading and information acquisition is dependent on the sources of information used by investors and on investors’ overconfidence. We add to the existing literature by investigating if the positive relationship between investment in information and intensity of trading in financial assets is sensitive to the sources of information used by investors, and if this influence is different for overconfident and non-overconfident investors.Our results confirm the classical statement that the more frequently individual investors invest in information, the more they trade in financial products. They also confirm behavioral finance findings that overconfident investors, who show a better than average bias, trade more frequently. Our findings are novel showing that the more overconfident and non-overconfident investors invest in information the more they trade, but the trading behavior is sensitive to the sources of information used. Overconfident investors trade less frequently when they collect information via friends and family, and non-overconfident investors trade more frequently when they use specialized sources of information.

► Relationship between frequency of trading, information and sources of information.
► Higher information frequency associated with more frequent trading but ….
► … Overconfident investors trade more.
► Overconfident investors trade more frequently when they use specialized information.
► Non-overconfident investors trade less frequently when they use advice from banks.