Journal of Financial and Quantitative Analysis

Research Articles

Survival of Overconfidence in Currency Markets

Thomas Oberlechnera1 and Carol Oslera2

a1 Webster University Vienna, Department of Psychology, Berchtoldgasse 1, A-1220 Vienna, Austria.

a2 Brandeis University, International Business School, Mailstop 32, 415 South St., Waltham, MA 02454.


This paper tests the influential hypothesis that irrational traders will be driven out of financial markets by trading losses. The paper’s main finding is that overconfident currency dealers are not driven out of the market. Dealers with extensive experience are neither more nor less overconfident than their junior colleagues. We set the stage for this investigation by providing evidence that currency dealers display two forms of overconfidence: They underestimate uncertainty, and they overestimate their professional success. This is notable because one might have expected the opposite: currency dealers face strong incentives for accuracy, they have access to comprehensive information, and they have extensive experience.

(Online publication January 06 2012)


We gratefully acknowledge helpful comments from Hendrik Bessembinder (the editor), Steve Cecchetti, Bing Han (a referee), Blake LeBaron, Lukas Menkhoff, Christopher Neely (a referee), Dagfinn Rime, Paroma Sanyal, Robert Shiller, David Simon, and Hanno Ulmer, as well as seminar participants at the Expertise in Context Conference in Berlin, the University of Hannover, Queens University Belfast, the LIEP group at Harvard University, Norges Bank, and the Federal Reserve Bank of New York. Also, we acknowledge with thanks each foreign exchange professional who took the time to fill out the survey. We gratefully acknowledge financial support for this research from Hottinger & Partner and the Austrian Science Fund (Schroedinger Scholarship #J2219 and #J1955-SOZ).