How does investor confidence lead to trading? Theory and evidence on the links between investor return experiences, confidence, and investment beliefs

We develop a theory and present empirical evidence from a real trading environment on a mechanism through which investor confidence leads to trading. More confident investors rely more on intuitive judgments when forming beliefs about expected returns. In particular, they rely more on naïve reinforcement learning and extrapolate recent individual return experiences into the future more strongly. Because such return experiences are volatile, more confident investors change their beliefs more strongly, and thus have more reason to trade.