Analysis of the Impact of Overconfidence and the Disposition Effect on European Stock Market Performance

Abstract

This thesis explores the impact of two major behavioral biases, overconfidence and the disposition effect, on European stock markets. While traditional finance assumes that investors act rationally, behavioral finance highlights how psychological factors can distort investment decisions and, consequently, market outcomes.

The study focuses on how overconfidence may lead investors to trade excessively and misprice risk, and how the disposition effect influences selling behavior, often causing investors to hold on to losing stocks while selling winners too early. By analyzing European stock data, this thesis seeks to evaluate whether portfolios constructed with these behavioral tendencies perform differently from more neutral market benchmarks.

The results provide insights into the role of investor psychology in shaping stock price dynamics, with implications for both academics and practitioners interested in understanding market inefficiencies.