We investigate the effects of arbitrageurs’ behavioral biases on cross-sectional equity returns under the assumption that arbitrageurs are Bayesian optimizers. We demonstrate that the profits of equity market neutral trading strategies are positively affected by overestimation, but do not find evidence of overprecision and self-attribution bias in these trading strategies. Of the last four decades since 1970, the effects of overconfidence on the profits of the trading strategies are the highest in the 2000s when arbitrage trading is active. Despite the active arbitrage trading, however, the potential profitability measured by alphas does not seem to be eroded away. As an explanation of why the performance of equity market neutral hedge portfolios appears to decrease significantly in the 2000s, we propose excess arbitrage trading driven by overconfidence. That is, the temporal profits of arbitrage strategies temporally increased by excessive trading of overconfident arbitrageurs are subsequently reversed. The poor performance that hedge fund managers suffer comes from the reversal of the selected hedge portfolios, the selection of which is affected by upward bias in temporal profits.