Learning to be overconfident

We develop a multiperiod market model describing both the process by which traders learn about their ability and how a bias in this learning can creat e overconfident traders. A trader in our model initially does not know his own ability. He infers this ability from his successes and failures. In ass essing his ability the trader takes too much credit for his successes. This leads him to become overconfident. A trader's expected level of overconfid ence increases in the early stages of his career. Then, with more experienc e, he comes to better recognize his own ability. The patterns in trading vo lume, expected profits, price volatility, and expected prices resulting fro m this endogenous overconfidence are analyzed.