Ambiguity and Overconfidence (original) (raw)

The Role of Overconfidence ? An Experiment on Attitudes Toward Two Types of Ambiguity

2019

Many decisions vulnerable to overconfidence involve considerable ambiguity, making it challenging to disentangle ambiguity attitude as a behavioral outcome and overconfidence as a decision bias. Through an incentivized lab experiment, we investigate the role of overconfidence on individual attitudes toward ambiguity generated from chance and ambiguity generated from individual performance. Although in both chance and performance conditions participants exhibit likelihood dependent attitudes, we find significantly more likelihood insensitivity for performance-generated ambiguity. For performance-generated ambiguity only, overconfidence is associated with more ambiguity seeking, which is not universal, as also overconfident decision makers exhibit ambiguity aversion at high likelihoods. Our results reconcile previous mixed findings on the relation of overconfidence and ambiguity attitudes. Further, based on likelihood dependence, we provide a unifying interpretation of the ambivalent ...

Overconfidence in investment decisions: An experimental approach

The European Journal of Finance, 2005

We experimentally test overconfidence in investment decisions by offering participants the possibility to substitute their own for alternative investment choices. Overall, 149 subjects participated in two experiments, one with just one risky asset, the other with two risky assets. Overconfidence increases (i) with the absolute deviation from optimal choices, (ii) with task complexity, and (iii) decreases with uncertainty as indicated by the difference between willingness to pay and to accept. JEL Classification: C91, D81, G11.

Three Essays on the Effect of Overconfidence on Economic Decision Making

2017

This dissertation uses experimental evidence to explore the effects of overconfidence on economic decision making. In Chapter 1 I provide experimental evidence of the effects of alcohol on overconfidence and several other important tasks. I also explore the relationship between overconfidence and the behavior in the other tasks. The data from this experiment show that an alcohol level of 0.08 does not have a systemic effect on behavior and more importantly it does not affect ones level of overconfidence. I also show that overconfidence is not significantly correlated with risk preferences, math, strategic behavior, anchoring, altruism, and food choices. In Chapter 2 I use feedback to establish a causal link between overconfidence and trading behavior. Feedback is used to eliminate the possibility for subjects to be overconfident about the accuracy of their signals. The data from this experiment show that overconfidence affects trading volume and profits, but when feedback is provide...

Overconfidence and perceived market efficiency

In behavioral finance overconfidence bias has widespread importance. It is generally argued that overconfidence bias makes the market less efficient, because it created mispricing in the form of access volatility and the overestimation of one belief about its precision in price predictions. This paper is in fact arguing in favor of overconfidence bias that it can increase the perceived efficiency of markets in future. Overconfident investors spend more time and resources to collect more and more information's that can draw prices more closely to its intrinsic value. This paper studies the impact of overconfidence on perceived market efficiency from three dimensions.

Behavioral Finance: The Aversion to Uncertainty Bias in Individual Financial Decisions

SSRN Electronic Journal, 2015

This research verifies the existence of the aversion to uncertainty bias in individual financial decisions. It also evaluates the effects of gender and knowledge in this bias. We considered a sample of 80 undergraduate management students from Universidade Católica de Brasília. The results supported the existence of the uncertainty bias amongst individuals facing financial decisions. Contrasting previous studies, men presented greater uncertainty bias than women. The students with higher financial knowledge presented lesser uncertainty bias when compared to the ones with reduced knowledge. This last result supports the classification of the aversion to uncertainty as cognitive and not emotional bias.

Overconfident investors and probability misjudgments

The Journal of Socio-Economics, 2010

This paper explores systematic distortions of subjective probabilities by overconfident investors. In agreement with many non-expected utility theories, our devised setup acknowledges nonlinear weighting of physical probabilities by both rational and overconfident investors. Overconfidence -assumed to be higher after a history of gains and lower after a history of losses -changes these probability transformations. Using US asset price data, overconfident investors are found to be more optimistic than rational investors about future prospects.

Informational Overconfidence in Return Prediction - More Properties

Social Science Research Network, 2012

A field experiment revealed 3 forms of unrealistic optimism in skilled investors' interval predictions of future stock returns. The judgmental intervals were about 50% shorter than realized spreads in recent 3-6 months histories, suggesting that ''underestimation of volatility'' persists past the financial crisis. The intervals, however, rapidly widened as predictions diverged from zero, and a complementary technical-forecasting experiment showed that the increased spread pattern emerges even when volatility is accounted. The results support ''anchoring with noisy monotone adjustments'' and suggest that overconfidence hazards may instinctively attenuate when expectations get extreme.

Informational overconfidence in return prediction – More properties q

2016

A field experiment revealed 3 forms of unrealistic optimism in skilled investors’ interval predictions of future stock returns. The judgmental intervals were about 50% shorter than realized spreads in recent 3–6 months histories, suggesting that ‘‘underestimation of volatility’’ persists past the financial crisis. The intervals, however, rapidly widened as predictions diverged from zero, and a complementary technical-forecasting experiment showed that the increased spread pattern emerges even when volatility is accounted. The results support ‘‘anchoring with noisy monotone adjustments’’ and suggest that overconfidence hazards may instinctively attenuate when expectations get extreme. 2013 Elsevier B.V. All rights reserved.

OVERCONFIDENCE BIAS AND ITS EFFECTS ON PORTFOLIO DECISIONs

International Journal of Creative Research Thoughts, 2023

Overconfidence biases exert a significant influence on portfolio decisions, often leading investors to make suboptimal choices driven by inflated self-assessment. This study delves into the intricate interplay of cognitive and emotional mechanisms that underlie overconfidence biases and their effects on investment portfolios. Theoretical foundations are rooted in behavioral finance literature, including studies by Barber and Odean, De Bondt and Thaler, and Gervais and Odean. These biases manifest through mechanisms such as illusion of knowledge, self-perception, emotional attachment, and illusion of control, impacting decisions ranging from asset allocation to market timing. The consequences of overconfidence biases encompass excessive trading, suboptimal asset allocation, impulsive decisions, market timing errors, underestimation of risks, and loss aversion. To mitigate these effects, strategies such as diversification, passive investing, long-term planning, behavioral coaching, scenario analysis, and education have been proposed. Incorporating these strategies into investment practices can aid investors in countering the influence of overconfidence biases, making more informed and rational portfolio decisions that align with long-term financial goals. Keywords: overconfidence biases, portfolio decisions, cognitive mechanisms, emotional mechanisms, illusion of knowledge, self-perception, emotional attachment, illusion of control, mitigation strategies.