Forms Of Overconfidence Research Articles

How fund manager speaks values: evidence from China

ABSTRACT Confidence, especially in the form of overconfidence, is a crucial psychological factor that influences fund managers’ investment behaviours. However, how to reliably quantify it remains an open question. The self-marketing endeavours via video-sharing platforms of mutual fund companies in China have unexpectedly provided persuasive avenue to gauge confidence through video appearances. This paper proposes a novel data integration framework, combining with multimodal content understanding techniques, and offers calculations of nonverbal personal traits from videos circulated in social media. In particular, we focus on managers’ vocal cues and construct a confidence measure from vocal pitch. Our findings reveal a substantial relation between vocal confidence and fund managers’ investment decisions. Our work also underscores the potential of multimodal data from social media in disclosing nuanced findings in the interdisciplinary studies of finance and psychology.

INTRINSIC, EXTRINSIC AND MNEMONIC FACTORS OF METACOGNITIVE MONITORING ACCURACY

The paper reports upon an investigation of metacognitive monitoring accuracy factors in learning tasks of university students. The experiment explores the contribution of some intrinsic, extrinsic and mnemonic factors such as type of learning material, task type, task complexity, and ease / difficulty of performing to metacognitive monitoring accuracy. The study was conducted among 233 university students. The empirical results show the predominance of metacognitive monitoring accuracy, while underconfidence is a downward trend. MMA (+ +) rates of metacognitive monitoring accuracy can be found in the easiest tasks on recollecting pairs of words and MMA (– –) rates – in general knowledge questions of medium difficulty. Overconfidence appears in the most difficult tasks on the deduction inferences and on the logical analogies. The results confirm the dependence of metacognitive monitoring accuracy on the level of ease / complexity of tasks and ease / difficulty of performing; the level of task complexity affects higher rates of metacognitive judgments’ inaccuracies, in particular, in the form of overconfidence. In open-answer questions there is a predominance of MMA (+ +) and MMA (– –) rates of metacognitive monitoring accuracy; underconfidence and overconfidence rates are also higher in openanswer questions. The more complex the task is, the greater is the confidence in the difficulty of performing. The results can be significant in the process of understanding the relationship between metacognitive monitoring accuracy and learning performance of university students.

The Effects of Demographic Factors on Investment Decision: Financial Literacy and Behavioral Bias as Mediating Variables

In society after COVID-19 Pandemic, awareness on financial well-being is on the rise and many attempts to achieve it through investment. But, to invest means to make decision among numerous alternatives and risks. This research aims to find out how investment actors’ demographic factors, financial literacy, and behavioral bias affect the investment decisions they make, where it highlights upon a point still rarely disclosed: whether financial literacy and behavioral bias are able to mediate the relationship between demographic factors and investment decision. The result for SEM-PLS analysis of 151 young investment actors below the age of 25 and adult investment actors of 25 years old and above shows that behavioral bias can act as a mediator while financial literacy cannot; demographic factors that is addition of family members, financial management behavior of financial literacy, and behavioral bias in the form of overconfidence all have a positive and significant effect as well. These findings give the implication that responsibilities towards one’s family, as well as financial behavior and self-confidence, play a noticeable role on investment decision.

The Effects of Demographic Factors on Investment Decision: Financial Literacy and Behavioral Bias as Mediating Variables

In society after COVID-19 Pandemic, awareness on financial well-being is on the rise and many attempts to achieve it through investment. But, to invest means to make decision among numerous alternatives and risks. This research aims to find out how investment actors’ demographic factors, financial literacy, and behavioral bias affect the investment decisions they make, where it highlights upon a point still rarely disclosed: whether financial literacy and behavioral bias are able to mediate the relationship between demographic factors and investment decision. The result for SEM-PLS analysis of 151 young investment actors below the age of 25 and adult investment actors of 25 years old and above shows that behavioral bias can act as a mediator while financial literacy cannot; demographic factors that is addition of family members, financial management behavior of financial literacy, and behavioral bias in the form of overconfidence all have a positive and significant effect as well. These findings give the implication that responsibilities towards one’s family, as well as financial behavior and self-confidence, play a noticeable role on investment decision.

The Effects of Demographic Factors on Investment Decision: Financial Literacy and Behavioral Bias as Mediating Variables

In society after COVID-19 Pandemic, awareness on financial well-being is on the rise and many attempts to achieve it through investment. But, to invest means to make decision among numerous alternatives and risks. This research aims to find out how investment actors’ demographic factors, financial literacy, and behavioral bias affect the investment decisions they make, where it highlights upon a point still rarely disclosed: whether financial literacy and behavioral bias are able to mediate the relationship between demographic factors and investment decision. The result for SEM-PLS analysis of 151 young investment actors below the age of 25 and adult investment actors of 25 years old and above shows that behavioral bias can act as a mediator while financial literacy cannot; demographic factors that is addition of family members, financial management behavior of financial literacy, and behavioral bias in the form of overconfidence all have a positive and significant effect as well. These findings give the implication that responsibilities towards one’s family, as well as financial behavior and self-confidence, play a noticeable role on investment decision.

Islamic Financial Literacy Amongst Muslims and Loyalty to Fatwas

This study aims to determine the extent of the financial literacy of the Muslim community in Ponorogo and their loyalty to the bank interest fatwa. This paper uses a field research approach using data collection methods in the form of interviews and observations and the analysis techniques used are descriptive-inductive. Based on the analysis of the data obtained, the following conclusions were found: 1. The perception of Ponorogo Muslims is divided into no types, namely agreeing with bank interest fatwas, doubting the existence of bank interest fatwas, and ignoring the provisions of bank interest fatwas. 2. The factors influencing the observance of Ponorogo Muslims are classified into 2 categories, namely those who obey which are divided into observance based on religious values (obedience) and obedience based on religious-rational considerations (internalization observance). Then those who disobey are caused because their legal awareness is still very weak, the causative factor is the nature of the fatwa itself and some of the following: (a) There is still difficult access to Islamic banking in their area; (b) Islamic bank services that tend to be the same as conventional banks; (c) Conventional banks and Islamic banks are practically considered to be no different, both of which have not adhered to sharia principles; 3. By behavioral finance analysis, it is found that (a) Those who agree with fatwas based on religious-rational values are not found any element of bias in them. (b) who doubts that there is an element of bias in the form of overconfidence with the initial information so as not to follow the development of the next information (bias anchoring). And those who ignore fatwas have no element of bias in them because they are supported by the fact that bank interest fatwas have no significant effect on the provisions of fatwas.

Testing the effectiveness of debiasing techniques to reduce overprecision in the elicitation of subjective continuous probability distributions

Formal expert elicitation is a widely used method for quantifying uncertain variables in decision and risk analysis. When estimating uncertain variables, experts and laypeople exhibit overprecision, meaning that the ranges of their estimates are too narrow. Overprecision, a form of overconfidence, is pervasive and hard to correct, thus posing a challenge to expert elicitation. Following the increasing interest toward improving judgments in Behavioral Operational Research (OR), and the limited evidence about the effectiveness of debiasing tools, the aim of our research is to test the effectiveness of commonly employed practices for debiasing overprecision. We conducted two experiments, testing a set of debiasing techniques when eliciting points of a cumulative distribution functions for general knowledge questions. The debiasing procedures included hypothetical bets, counterfactual argumentation, and automatic stretching to increase the ranges of subjects’ initial estimates. We find that two debiasing strategies that require further reasoning after initial estimates (hypothetical bets and counterfactuals) were not very effective for reducing overprecision, while the use of multipliers that increase the initial range of distributions, coupled with a re-elicitation of the distribution with the new range, provided more positive results. We provide some recommendations for expert elicitation in OR practice, based on our findings, and suggest avenues for further research into debiasing overprecision.

The forms of financial literacy overconfidence and their role in financial well‐being

AbstractOverconfidence in financial literacy (FL) is defined and assessed in various ways, and results regarding the effects of FL overconfidence on financial well‐being are inconsistent. Therefore, this study aims to develop our understanding of the processes by which overconfidence in FL influences the financial well‐being of consumers; that is to separately examine the effects of the different forms of FL overconfidence on financial well‐being. In order to map the associations between FL, the forms of FL overconfidence, and financial well‐being, the data of 506 randomly selected Hungarian test‐takers were collected by a self‐report questionnaire. According to the results, FL and its overestimation (OE) are positively linked to households' financial outcomes. Hence, perceived FL is a better predictor of financial well‐being than actual FL skills. Moreover, the results add to the existing body of literature by showing that the effects of the different forms of overconfidence are divergent: overprecision and OE may be damaging. Thus, the paper provides evidence that FL overconfidence is a multifaceted construct, and its different forms affect financial well‐being differently.

Overconfidence Across Cultures

Overconfidence is a robust cognitive bias with far-reaching implications, but prior research on cultural differences in overconfidence has been conflicting. We present two studies that measure the three forms of overconfidence across cultures, allowing us to paint a more complete picture of cross-cultural overconfidence than previous studies. In Study 1, we compare overconfidence among participants from cultures traditionally considered individualistic (the US and UK) with participants from cultures traditionally conceptualized as collectivistic (India and China). In Study 2, we employ a new task to compare overconfidence in participants from the US and India. Our first key result is the successful cross-cultural replication, in both studies, of the effect of task difficulty on overestimation and overplacement, which bolsters our faith that our measures operate similarly across cultures. Our second key finding is that, while we find evidence of higher overestimation in our Indian participants, neither overplacement nor overprecision show consistent cross-cultural differences. Taken as a whole, our results suggest that previous findings of increased overconfidence in participants from collectivistic cultures may not be as robust as previously reported.

Credit ratings, private information, and bank monitoring ability

In this paper, we use credit rating data from two large Swedish banks to elicit evidence on banks’ loan monitoring ability. For these banks, our tests reveal that banks’ internal credit ratings indeed include valuable private information from monitoring, as theory suggests. Banks’ private information increases with the size of loans. However, our tests also reveal that publicly available information from a credit bureau is not efficiently impounded in the bank ratings: credit bureau ratings predict future movements in bank ratings and improve forecasts of both bankruptcy and loan default. The inefficiency of bank ratings is greater for smaller loans. We investigate possible explanations for these findings. Our results are consistent with bank loan officers placing too much weight on their private information, a form of overconfidence. Risk analyses of the loan portfolios in our data could thus be improved by combining the bank credit ratings with public credit bureau ratings. The methods we use represent a new basket of straightforward techniques that enable both financial institutions and regulators to assess the performance of credit rating systems.

OPTIMAL TERM LENGTH FOR AN OVERCONFIDENT CENTRAL BANKER

This paper discusses the implications of overconfidence when it affects a monetary policy maker. We consider two forms of overconfidence: the illusion of precision and the illusion of control. Incorporating them into a standard New Keynesian framework, we consider the optimal term length of a central banker and examine how it depends on the types and degrees of overconfidence. In particular, we show that the legal mandate should always be lengthened when these two types of biases increase by the same percentage magnitude.

A Study on Project Duration Incentives in a Retail Apparel Franchise

This paper studies the impact on project duration of different forms of over-confidence among general contractors executing such projects, in the context of retail apparel franchises. It goes on to consider the design of relevant incentives and, in particular, a compensation mechanism included in the initial contract that covers the event of contractor dismissal. This mechanism is examined as a means of hedging risk arising from the behavior of the principal. This includes a study of a two-way risk avoidance strategy, which is intended to make up for a shortfall in this regard in the existing literature. Outcomes derived from this research include the conclusion that different levels of confidence can have various impacts on optimal incentive coefficients and the effort level extracted from agents, thereby affecting the ultimate configuration of an optimal contract. Introducing a compensation mechanism covering the event of dismissal can serve to diminish the risk of an agent breaching their contract. This paper applies the concept of bounded rationality to a principal-agent model, ensuring conclusions that are attuned to reality.

What Makes Technical Analysis Popular?

According to the Efficient Market Hypothesis, investors cannot achieve above-average returns by using technical analysis tools. This paper attempts to answer the question as to what makes technical analysis popular, regardless of the efficiency of capital markets. The objective is to verify whether investors have certain cognitive inclinations that make them more likely to believe in the efficiency of technical analysis models. We postulate a positive relationship between different forms of overconfidence and faith in the effectiveness of technical analysis methods. This relationship was confirmed only in the case of the “better than average” effect. The two other examined forms of overconfidence, namely, overprecision and illusion of control, did not yield statistically significant results. However, the lack of confirmation by all three forms of overconfidence is in line with the results presented in the literature, namely, that there are no significant relationships between different forms of overconfidence.

Wishful Expectations in Natural Gas Markets

The energy industry has been slow to move away from fossil fuels and towards renewable resources. In this paper I find evidence for a cognitive bias that plays a role in this momentum. Energy executives’ expectations of future energy prices are strongly correlated with their own preferences, which I document for the case of natural gas prices. This is an example of wishful expectations, a form of overconfidence in which people are excessively optimistic over uncontrollable future outcomes. This implies energy executives with strong exposure to fossil fuels are excessively optimistic on future prices and so continue to invest despite the presence of superior alternatives. Within the wider corporate investment literature, this paper implies that wishful expectations hold for long term investments related to large, liquid commodity markets. These commodities have forward markets that allow firms to lock in prices, yet wishful expectations are still observed. This has previously been documented with utility purchasers forecasting natural gas prices below the prevailing forward prices (Bolinger et al. 2006).

How do judgmental overconfidence and overoptimism shape innovative activity?

Recent field evidence suggests a positive link between overconfidence and innovative activities. In this paper we argue that the connection between overconfidence and innovation is more complex than the previous literature suggests. In particular, we show theoretically and experimentally that different forms of overconfidence may have opposing effects on innovative activity. While overoptimism is positively associated with innovation, judgmental overconfidence is negatively linked to innovation. Our results indicate that future research is well advised to take into account that the relationship between innovation and overconfidence may crucially depend on what type of overconfidence is most prevalent in a particular context.

How Do Judgmental Overconfidence and Overoptimism Shape Innovative Activity?

Recent field evidence suggests a positive link between overconfidence and innovative activities. In this paper we argue that the connection between overconfidence and innovation is more complex than the previous literature suggests. In particular, we show theoretically and experimentally that different forms of overconfidence may have opposing effects on innovative activity. While overoptimism is positively associated with innovation, judgmental overconfidence is negatively linked to innovation. Our results indicate that future research is well advised to take into account that the relationship between innovation and overconfidence may crucially depend on what type of overconfidence is most prevalent in a particular context.

How Do Judgmental Overconfidence and Overoptimism Shape Innovative Activity?

Recent field evidence suggests a positive link between overconfidence and innovative activities. In this paper we argue that the connection between overconfidence and innovation is more complex than the previous literature suggests. In particular, we show theoretically and experimentally that different forms of overconfidence may have opposing effects on innovative activity. While overoptimism leads to an innovation enhancing effect, judgmental overconfidence inhibits innovation. Our results indicate that future research is well advised to take into account that the relationship between innovation and overconfidence may crucially depend on what type of overconfidence is most prevalent in a particular context.

Survival of Overconfidence in Currency Markets

AbstractThis paper tests the influential hypothesis that irrational traders will be driven out of financial markets by trading losses. The paper’s main finding is that overconfident currency dealers are not driven out of the market. Dealers with extensive experience are neither more nor less overconfident than their junior colleagues. We set the stage for this investigation by providing evidence that currency dealers display two forms of overconfidence: They underestimate uncertainty, and they overestimate their professional success. This is notable because one might have expected the opposite: currency dealers face strong incentives for accuracy, they have access to comprehensive information, and they have extensive experience.

Endogenous overconfidence in managerial forecasts

We examine whether attribution bias leads managers who have experienced short-term forecasting success to become overconfident in their ability to forecast future earnings. Importantly, this form of overconfidence is endogenous and dynamic. We also examine the effect of this cognitive bias on the managerial credibility. Consistent with the existence of dynamic overconfidence, managers who have predicted earnings accurately in the previous four quarters are less accurate in their subsequent earnings predictions. These managers also display greater divergence from the analyst consensus and are more precise. Lastly, investors and analysts react less strongly to forecasts issued by overconfident managers.

Endogenous Overconfidence in Managerial Forecasts

We examine whether attribution bias that leads managers who have experienced short-term forecasting success to become overconfident in their ability to forecast future earnings. Importantly, this form of overconfidence is endogenous and dynamic. We also examine the effect of this cognitive bias on the managerial credibility. Consistent with the existence of dynamic overconfidence, managers who have predicted earnings accurately in the previous four quarters are less accurate in their subsequent earnings predictions. These managers also display greater divergence from the analyst consensus and are more precise. Lastly, investors and analysts react less strongly to forecasts issued by overconfident managers.