(more rationally priced) than small stocks, because it is easier to cover the
fixed investigation cost in large, liquid stocks. This suggests greater ineffi-
ciencies for small stocks than for large stocks, and for less liquid securities
and assets such as real estate than for stocks. Furthermore, since the model
is based on overconfidence about private information, the model predicts
that return predictability will be be strongest in firms with the greatest in-
formation asymmetries. This also implies greater inefficiencies in the stock
prices of small companies. Furthermore, proxies for information asymme-
try such as the adverse selection component of the bid-ask spread should
also be positively related to momentum reversal, and postevent drift.
It is an open question whether the overconfident traders in the model can
be identified with a specific category of investor, such as institutions, other
investment professionals, small individual investors, or all three. Even small
individual investors, who presumably have less information, may still be
overconfident. The uninformed investors of the model could be interpreted
as being contrarian-strategy investors (whether institutions or individuals).
(Some smart contrarian investors could be viewed as rational and informed;
including such traders would not change the qualitative nature of the model
predictions.) An identification of the confidence characteristics of different
observable investor categories may generate further empirical implications,
and is an avenue for further research.
INVESTOR PSYCHOLOGY 489