Finding evidence of investment skill or incompetence
Professional investors are usually either skilled (informed) or incompetent (deluded), but can one actually demonstrate such skill or incompetence empirically?
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Tag: deluded traders
Who are the deluded investors? Probably you and me!
Deluded investors are foolish market participants who are uninformed but transact in financial markets with the delusion that they are informed. They would trade actively in an attempt to outperform when a security is mispriced according to their analysis. Deluded participants are, however, wrong in believing that they know the fair value of the security.
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Irrational investors trust in greater fools
We have classified market participants into five types. In this post we describe the irrational investors or traders in more detail. As explained before, the irrational traders are the market participants who are informed, but still transact although they understand that they are buying securities above fair value or are selling securities below fair value. Even so, they believe that their strategy will lead to outperformance.
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