Disposed to Be Overconfident

We hypothesize that individuals learn about their investment ability based on realized gains and losses rather than overall portfolio performance. Thus, the disposition effect–the tendency to hold losers and sell winners–can be a source of investor overconfidence. We find that when (i) investors at a Dutch bank and (ii) investors in experiments sell more often for a gain, they exhibit overconfidence in their investment ability. Furthermore, in the experimental setting, this biased learning process leads to increased risk-taking.