Fed On Trading: Self-Manipulation with Alcohol and Drugs

New white paper from New York Federal Reserve researcher and University of Michigan professor show that risk tastes and overconfidence are related

It’s a vicious cycle in trading: overconfident traders push valuations higher, causing traders to become yet more confident, leading to yet higher valuations, sometimes accompanied and facilitated by artificial stimuli such as cocaine -- and the opposite spiral occurs in crashes (the study discusses the use of drugs and alcohol in one segment). As long term risk management considerations are put on the back burner, such feedback loops are the natural outcome. Such is the essential finding of a new study from a University of Michigan finance professor and a New York Federal Reserve researcher.

The paper, titled “Anxiety, Overconfidence,...