Overconfidence in Passive Investing: The Role of Personality and Personal Experience

Passive investing has surpassed active investing, representing over 50% of global assets under management (AUM) for the first time since its inception five decades ago.From behavioral finance perspective, moving from active to passive is a shift beyond arithmetic and logic.Both styles require behavioral alignment on individual investors, failing which there will be no basis of confidence to hold such investment over time.A comparative study was made between active and passive investors in the context of overconfidence bias, i.e., the most popular behavioral bias studied among retail investors.Given the enduring nature of human overconfidence, the study explored whether passive investors exhibit similar level of bias as their active counterparts.Additionally, a natureand-nurture model incorporating investor's personality and personal experience were included as antecedents to enrich understanding on its effect toward overconfidence.For the purpose of this study, a questionnaire survey was conducted among Malaysian investors surrounding the Covid-19 pandemic in early 2020.Data on three hundred and fifty retail investors were garnered with self-report on personality, personal experience, overconfidence and investing style.On the instruments, we employed Gray's neuropsychological perspective of personality in the expression of behavioral inhibition and activation systems (BIS/BAS).Overconfidence was analyzed in three forms, i.e., better-than-average (BTA), illusion-of-control (IOC), and volatility estimate (VOLEST).The result showed that overconfidence bias is observed among active and passive investors.Additionally, investors with higher BIS inversely predict IOC which in turn lead to adoption of passive investing.Winning experiences positively affect IOC which in turn lead to active investing.The last section discussed the implication of overconfidence in passive investing and the role of personality and personal experience in eliciting client's risk profile.