Level Of Overconfidence Research Articles

Potential Underdog Bias, Overconfidence and Risk Propensity in Investor Decision-Making Behavior

In this study we investigate whether investors are prone to take risks, both in terms of how they rate their risk propensity and their behavior in choosing between options with different risk levels, and whether they display overconfidence and underdog bias. We also investigate the relationships among underdog bias, overconfidence and risk propensity. The results indicate overconfidence levels similar to that in other populations and do not reveal underdog bias or high levels of risk propensity. We found support for a negative predictive relationship between underdog bias and overconfidence.

Leveling the Playing Field: Overconfident CEOs and the News in Short Interest

We study the informational role of overconfident CEOs. We find that the stocks of overconfident CEOs have lower analyst forecast dispersion, higher breadth of investor ownership, and lower informed trading intensity. These patterns also arise around CEO turnover. We also show that overconfident CEOs level the playing field between short sellers and other investors, as the (good) news in short interest (Boehmer, Huszar, and Jordan, 2010) exists only among stocks with non-overconfident CEOs and disappears among stocks with overconfident CEOs. Our results suggest that overconfident CEOs help increase information efficiency and lower the mispricing of their company shares.

Private information advantage or overconfidence? Performance of intraday arbitrage speculators in the Chinese stock market

Using a unique investor account database from a large brokerage company in China, we study the relationship between overconfidence and individual stock investment performance. We show that overconfident investors hurt their performance by trading more in general. We then focus on the effects of the different overconfidence levels of intraday and non-intraday arbitrage investors to study how overconfidence affects individual investor behaviour. Intraday arbitrage investors tend to be more overconfident and have lower returns. We discover the different U-shaped patterns between the two groups; while overconfident investors trade more in non-intraday arbitrage groups that hurt their returns, the excess trading times of intraday arbitrage investors also show that they are better at gaining profits with higher trading frequency. We further conclude that the realised returns of intraday arbitrage induce higher levels of investor overconfidence, which hurts the overall returns of investors. We provide the first direct empirical evidence of the effect of overconfidence on individual investment returns in the Chinese stock market.

Impacto do excesso de confiança na estrutura de capital: evidências no Brasil e nos Estados Unidos

According to behavioral finances, decisions made by individuals are not always entirely rational, these individuals may be influenced by psychological factors such as biases and heuristics. In this sense, the objective of this article is to verify how the managers' overconfidence can interfere in the decisions of the capital structure of the organization, both in the Brazilian market and in the North American market. The sample selected is composed of 100 Brazilian companies listed in B3 and 77 US companies listed on the NYSE. The data were collected with the help of the Thomson Reuters Eikon® and Comdinheiro platforms, and through the reports posted on the companies' websites. The analysis was done for the period from 2010 to 2015, and counted on a panel data analysis in which multiple regression models were applied, considering an index of overconfidence, levels of overconfidence: overprecision, overestimation and the overplacement, and based on the profile of managers. The results obtained evidenced a significant relationship between overconfidence and capital structure decisions in both Brazilian and North American companies, and as the level of overconfidence increased, the impact on leverage also increased. It was also noticed a greater impact of this behavioral bias on the decisions made by managers of companies of the United States, allowing to conclude that behavioral issues, directed to the profile of the individuals also has its impact on the organizational decisions.

Investigating the effects of age and gender on cowitness suggestibility during blame attribution

AbstractDespite a large body of research investigating the effects of age and gender on eyewitness suggestibility, the majority of studies has focussed on the impressionability of participants when attempting to recall the presence of items from an event. Very little research has attempted to investigate the effects of age and gender on the suggestibility of eyewitnesses when attempting to attribute blame. Participants (N = 268) viewed and discussed a crime (video) with cowitnesses before giving individual statements. Confederates were used to expose the participants to misinformation during the discussion, suggesting that the wrong bystander was responsible for the offence. Findings indicated that participants who encountered the misinformation were more likely to make a false blame attribution and were more confident in their erroneous judgements. The results found no significant age‐ or gender‐related differences in blame conformity rates; however, male eyewitnesses showed greater levels of overconfidence in their false responses than female participants, after encountering cowitness misinformation.

Individual differences in higher-level cognitive abilities do not predict overconfidence in complex task performance.

Even when people perform tasks poorly, they often report unrealistically positive estimates of their own abilities in these situations. To better understand the origins of such overconfidence, we investigated whether it could be predicted by individual differences in working memory, attentional control, and self-reported trait impulsivity. Overconfidence was estimated by contrasting objective and subjective measures of situation awareness (the ability to perceive and understand task-relevant information in the environment), acquired during a challenging air traffic control simulation. We found no significant relationships between overconfidence and either working memory or attentional control. However, increased impulsivity significantly predicted greater overconfidence. In addition, overall levels of overconfidence were lower in our complex task than in previous studies that used less-complex lab-based tasks. Our results suggest that overconfidence may not be linked to high-level cognitive abilities, but that dynamic tasks with frequent opportunities for performance feedback may reduce misconceptions about personal performance.

The impact of shared financial decision making on overconfidence for married adults

AbstractPrevious research has shown that overconfidence is associated with a decrease in the quality of decision making and, therefore, decision outcomes. However, less is known about the conditions or circumstances that reduce financial overconfidence. Using data from two national studies, this study was designed to provide insights into the dynamics of intrahousehold financial decision making by examining the role of shared decision making in reducing overconfidence bias. Findings suggest that a psychological sense of shared ownership of money is associated with lower levels of overconfidence. With regard to financial planning practice, these results suggest that married individuals who believe in shared ownership of household money tend to have lower levels of overconfidence.

Applications of the reflective practice questionnaire in medical education

BackgroundWe sought to determine whether the Reflective Practice Questionnaire (RPQ) is a reliable measure of reflective capacity and related characteristics in medical students. We also planned to learn how the RPQ could be used in medical education.MethodsThe RPQ is a 40 item self-report questionnaire that includes a multi-faceted approach to measuring reflective capacity. It also includes sub-scales on several other theoretically relevant constructs such as desire for improvement, confidence, stress, and job satisfaction. The reliabilities of reflective capacity and other sub-scales were determined by calculating their Cronbach alpha reliability values. In the present study, the RPQ was answered by 98 graduating fourth-year medical students from an American University, and these RPQ scores were compared with general public and mental health practitioner samples from a prior study using ANOVA and Bonferroni adjusted comparisons.ResultsMedical students reported a higher reflective capacity than the general public sample, but students were statistically indistinguishable from the mental health practitioner sample. For medical students, reflective capacity was associated with features of confidence, stress, and desire for improvement. Job satisfaction was positively associated with confidence in communication with patients, and negatively associated with stress when interacting with patients. A cluster analysis revealed that around 19% of the medical students exhibited a relatively high level of anxiety interacting with patients, 23% were less engaged, 5% were dissatisfied, and 7% expressed a level of over-confidence in their knowledge and skills that was concerning.ConclusionsThe RPQ is a reliable measure of reflective capacity (Chronbach’s alpha value = 0.84) and related characteristics (Cronbach’s alpha values from 0.75 to 0.83) in medical students. The RPQ can be used as part of pre-post evaluations of medical education initiatives, to complement student self-reflection activities in the curriculum, and to identify students who might benefit from targeted intervention.

Bullshitters. Who are They and What Do We Know About Their Lives?

'Bullshitters' are individuals who claim knowledge or expertise in an area where they actually have little experience or skill. Despite this being a well-known and widespread social phenomenon, relatively few large-scale empirical studies have been conducted into this issue. This paper attempts to fill this gap in the literature by examining teenagers' propensity to claim expertise in three mathematics constructs that do not really exist. Using Programme for International Student Assessment (PISA) data from nine Anglophone countries and over 40,000 young people, we find substantial differences in young people's tendency to bullshit across countries, genders and socio-economic groups. Bullshitters are also found to exhibit high levels of overconfidence and believe they work hard, persevere at tasks, and are popular amongst their peers. Together this provides important new insight into who bullshitters are and the type of survey responses that they provide.

Exploring the Dunning-Kruger Effect in a Collectivist Arab Society: An empirical study in the United Arab Emirates

Exploring the Dunning-Kruger Effect in a Collectivist Arab Society: An empirical study in the United Arab Emirates

Reservation Return and Asset Pricing Inference

We utilize a novel data about households’ reservation returns to reexamine the limited stock market participations and the equity premium puzzles, where instead of asking why households are too averse to risk, we ask why households exhibit greater reservation returns (which reflect the instantaneous price of deferring consumption) than what the standard finance theory suggests. We employ theoretical model that utilizes the psychology Maslow theory about basic needs (minimum consumption) to explain the discrepancy of reservation return between the theory and data. Empirically, we find that the reservation return varies across households and is higher for women and minorities as well as investor’s with great experience and overconfidence level. Furthermore, the reservation return influences the propensity to participate in the stock market and most importantly does not co-vary with households’ risk tolerance levels. Collectively, the reservation return is a critical determinant for stock market participation and asset pricing in general.

Determinants of overconfidence bias in Indian stock market

PurposeThe purpose of this paper is to conduct an exploratory analysis of the demographic factors and investors’ characteristics, which cause changes in the extent of overconfidence level and its constituents among the individuals.Design/methodology/approachA survey has been conducted to explore the determinants of overconfidence and its constituents with the help of a well-structured close-ended questionnaire. The four constituents of overconfidence considered for the study are “better than average effect,” “planning fallacy,” “self-attribution” and “positive illusion.” The collected data are analyzed with the help of t-test, ANOVA and standard ordinary least square regression.FindingsThe results show that those who earn high, have more dependents, share the earning responsibility, have high investment frequency, less time horizon and more investment experience and invest in large cap stocks are more subject to the overconfidence. The study also concludes that gender, age and general education do not affect the level of overconfidence.Research limitations/implicationsThe results of the study are useful for the market regulators, financial educators, stock market advisors and individual investors in avoiding costly investment mistakes, especially when transiting from one category of demographic and investment characteristics to another category of demographic and investment characteristics.Originality/valueThe study is unique in itself, as it contributes an instrument to quantify the level of overconfidence among the individual investors. Moreover, the study attempts to explore the impact of all demographic and investment characteristics in one go, which makes it a valuable contribution in the existing literature.

Overconfident Newsvendor’s Joint Pricing and Ordering Decisions under the Additive Demand Case

Booming cross-border e-commerce in China has made market demand become more uncertain and volatile, which has imposed more challenges on the pricing and ordering decisions of retailers. More behavioral and cognitive factors need to be taken consideration in operations management and inventory management in particular. Aiming at newsvendor’s overconfidence psychology, we define newsvendor overconfidence under the additive demand case where demand is price dependent, construct the decision model, derive the optimal joint pricing and ordering decisions and analyze structural properties. The analysis proposes the sufficient condition for the existence of the unique optimal price and order quantity. And we find that the optimal price and stock factor both increase with newsvendor’s overconfidence level. Finally, the effect of overconfidence level on optimal decisions is verified through a numerical example and some practical implications are highlighted.

Does Good Luck Make People Overconfident? Evidence from a Natural Experiment in China

This paper examines the changes in investors’ trading behavior after winning an IPO allotment in China—a purely luck-driven event. We find that these investors subsequently become overconfident: They trade more frequently and lose more money relative to other investors. This effect is stronger when investors are inexperienced and when investors’ pre-existing level of overconfidence is low. We also show that investors exhibit a stronger gambling propensity and hold more lottery-like stock after winning an IPO allotment. Our findings are not explained by wealth effects or house money effects. Overall, our evidence indicates that the experience of good luck makes people overconfident about their prospects.

Optimization on pricing and overconfidence problem in a duopolistic supply chain

We analyze the impact of the retailer's overconfidence on the supply chain performance. We consider a duopolistic market with uncertain demand where one overconfident retailer and one rational retailer compete in selling the same product. We identify two cases in terms of the rational retailer's overconfidence awareness: (1) the rational retailer is aware of the other retailer's overconfidence; (2) the rational retailer is not aware of the other retailer's overconfidence. We first analyze the two retailers’ decision processes in a Nash game and derive their optimal decisions, and further discuss a Stackelberg-like game for an extension. We conduct a numerical analysis to examine the impact of overconfidence on the optimal pricing, ordering decisions and expected profits. We find that the higher the overconfident level is, the higher selling price that the overconfident retailer charges. Together, the results stress that the overconfidence does not necessarily damage the supply chain performance.

"Yes, we know!" (Over)confidence in general knowledge among Austrian entrepreneurs.

Overconfidence has been reported to be a common bias among entrepreneurs and might be one cause of the high failure rates observed for new ventures. In this study, we investigate the overconfidence bias in a sample of 92 Austrian entrepreneurs, who responded to a general-knowledge questionnaire. Their levels of overconfidence were assessed by their responses to hard, medium and easy knowledge questions, and the relations of individual, organizational and environmental factors to the bias score were analyzed. The results confirmed that entrepreneurs are indeed prone to expressing overprecision, a type of overconfidence, but not when answering questions of all levels of difficulty. Being a single founder instead of a co-founder was identified as a significant predictor of overconfidence. Confidence, on the other hand, was associated with age and prior entrepreneurial experience, while accuracy was determined solely by age. The results of this study only partly agree with those of previous studies conducted in different national and cultural settings.

Investors’ perception of CEO overconfidence: evidence from the cost of equity capital

Prior literature documents that CEO overconfidence plays an important role in corporate financial reporting and accounting decisions. However, an unexplored issue is how investors perceive the risks associated with CEO overconfidence. This study examines the effect of CEO overconfidence on the cost of equity capital. We find that the association between CEO overconfidence and the cost of equity is nonlinear: a moderate level of CEO overconfidence results in the lowest cost of equity capital after controlling for other known determinants of the cost of equity. We also find an inverted nonlinear relation between CEO overconfidence and equity issuance, which corroborates our main conclusion of the nonlinear effect of CEO overconfidence on the cost of equity. Our results are robust to alternative overconfidence measures, cost of equity measures, and change analysis.

Continuing overreaction and momentum in a market with price limits

In this paper, we document strong return predictability for continuing overreaction in Taiwan, a market without the existence of momentum for conventional momentum strategies. Using signed volume to proxy for the level of continuing overreaction, we show that the strategy that buys stocks with upward continuing overreaction and short sells those with downward continuing overreaction generates both intermediate-term continuations and long-term reversals in this market. The evidence is consistent with the prediction of the model based on investor overconfidence and biased self-attribution in predicting future stock returns. We further examine the impact of price limits on this overreaction-based return predictability by isolating the information embedded in signed volumes for limit-hit and non-hit days, respectively. The findings indicate that the imposition of price limits seems to restrain investors' overreaction behavior and that trading volume in non-hit days is a cleaner measure to capture the level of investor overconfidence in generating intermediate-term continuations and long-term reversals.

Does Good Luck Make People Overconfident? Evidence from a Natural Experiment in China

This paper examines the changes in households’ trading behavior after winning an IPO allotment in China—a purely luck-driven event. We find that these households subsequently become overconfident: they trade more frequently and lose more money relative to other households. This effect is stronger when households are inexperienced and when households’ pre-existing level of overconfidence is low. Our findings are not explained by wealth effects or house money effects. Overall, our evidence indicates that the experience of good luck makes people overconfident about their prospects.

Testing the effect of belief adjustment model and overconfidence on investment decision making

This study aims to examine the effect of belief adjustment models, consisting of presenta-tion pattern (Step by Step and End of Sequence), information sequence, and information series, on investment decision making. In addition, this study also examines the effect of the level of overconfidence on investment decision making. The designs of experiment included in this study are presentation pattern 2 × 2 × 2 × 2 (Step by Step and End of Sequence), information sequences (good news followed by bad news and bad news fol-lowed by good news), information series (long series and short series), and the level of overconfidence. The research hypotheses are tested using Independent Sample t-test. The results of this study show that there is a recency effect on the presentation pattern of the Step by Step for long and short information series. This is also reflected in the End of Sequence which shows that there is no recency effect occurring in the long series, but there is recency effect occurring in the short series.