A Review of the Relationship Between Investor Overconfidence, Optimism, and Market Volatility

Abstract

Based on the theory of behavioral finance, using systematic literature review and comparative analysis methods, this study systematically integrates the connotations and mechanisms of action of two core cognitive biases: overconfidence and over-optimism. This study primarily analyzes the relationship between two types of investor cognitive biases and the respective impacts on market volatility. This study also analyzes the irrational behavior of individual investors and institutional investors under cognitive biases. This study provides an explanation of the intrinsic logic by which the interaction between the two amplifies market volatility. Based on existing literature, this study summarizes the commonalities and differences in the irrational behaviors of individual and institutional investors, points out the limitations of existing research, and provides useful reference and insights for regulating investor behavior and preventing irrational market fluctuations. Finally, looking ahead, the directions for future research include the impact of cross-market sentiment fluctuations and investors' irrational behavior in digital finance scenarios with the development of technology.