Overconfidence and Confirmation Bias in Trading: A Narrative Review of Empirical Findings and Behavioral Interactions

Overconfidence and confirmation bias are among the most pervasive cognitive distortions in financial decision-making, profoundly influencing both trading behavior and overall market dynamics. This narrative review synthesizes empirical literature on these biases, drawing from over one hundred studies spanning brokerage data, experimental markets, and agent-based models. The study begins by elucidating their conceptual foundations within behavioral finance, contrasting them with rational paradigms like the Efficient Market Hypothesis (EMH). The review highlights how cognitive determinants, such as miscalibration and self-attribution, interact with emotional drivers including greed and self-image concerns, making these biases highly persistent even among professional investors. Empirical evidence consistently demonstrates the economic costs of overconfidence, reflected in excessive trading volumes (approximately 45% higher among men), annual return erosions of 1–3%, and heightened volatility in emerging markets such as the Saudi Tadawul and Asia-Pacific REITs. Confirmation bias exacerbates these through selective exposure, fostering underreaction to disconfirming signals. Taken together, these interlocking mechanisms form self-reinforcing feedback loops that amplify speculative bubbles and behavioral disruptions during financial crises. Although educational interventions and exposure to diverse perspectives show potential in mitigating these biases, significant research gaps remain in understanding their non-financial consequences and cross-cultural variations. This review contributes a unified framework for mitigating cognitive distortions in trading, urging regulators, educators, and practitioners to adopt evidence-based strategies that enhance market efficiency and strengthen investor resilience.