Optimistic, but selling riskier stocks—An arbitrage experiment in crisis market

The field-based experimental approach was utilized to collect zero-investment portfolios from more than 100 competent investors at the peak of the financial crisis. The average annual return on 117 arbitrage portfolios was 5.2% with 55% profitability rate, but prior self-confidence strongly correlates with eventual performance with yearly returns reaching 26% for the highest confidence quartile. The stocks selected for short-sale were riskier than the stocks selected for purchase and time-series estimations show that the unbalanced positions diminished profitability while markets recuperated. As most participants anticipated the recovery at the time of decision, the selling of riskier stocks suggests that “misperception of financial risk” (Shefrin, 1999) impaired performance.