Overconfident investors actually think the stock market is scarier than the cautious ones do.
March 26, 2026
Original Paper
The Overconfidence Paradox: Reservation Returns and Investor Beliefs
SSRN · 6465520
The Takeaway
We typically think overconfident people underestimate risk. This study finds the 'overconfidence paradox': these investors actually inflate the perceived risk and 'aspiration benchmarks' of the market, requiring a much higher 'reservation return' to participate at all, rather than simply believing the market is safer than it is.
From the abstract
Reservation return, the minimum acceptable return required to invest in the stock market, is fundamental yet understudied in finance. Much like reservation wages explain unemployment, reservation returns explain limited stock market participation, with important implications for household financial decisions. We develop a theoretical framework linking reservation return to overconfidence and derive an inverse relationship under mean-variance utility. Taking this to the data, however, we find a p