Relative Overconfidence Research Articles

Is Entrepreneurial Intention an Antidote to Ambiguity Aversion?

Many entrepreneurial decisions involve substantial ambiguity. Using contemporary decision theories, I elicit ambiguity attitudes, without estimating utility functions or risk attitudes. The experiment features two main conditions that are quantitatively equivalent, but differ in their textual framing. In the chance frame, likelihood of success depends on environmental contingencies, whereas in the skill frame, entrepreneurial skill can influence the likelihood of success. I control for participants' entrepreneurial intention and relative overconfidence. Key findings indicate that, first, in both conditions, ambiguity attitudes depend on likelihood of success. Second, in the chance frame, participants predominantly exhibit ambiguity aversion, whereas in the skill frame, ambiguity seeking prevails. Third, relative overconfidence, orthogonal to entrepreneurial intention, does not explain the observed differences in ambiguity attitudes between skill and chance frames. Finally, entrepreneurial intention is relevant to the skill frame only, in which setting it significantly reinforces ambiguity seeking. Hence, entrepreneurial intention offsets ambiguity aversion in the pertinent context.

Overconfidence: The Influence of Positive and Negative Affect

The consequences of overconfidence affect many spheres of economic life. As yet, few factors are known that determine the extent of possible overconfidence. There are also few studies concerning the influence of positive and negative emotions on self-assessment. It has not yet been examined whether emotions can affect learning effects regarding self-assessment, wherefore the present study addresses this research question. In a real-effort-task experiment the participants are presented with tasks over the course of 5 rounds. After each round, they are asked to assess their own performance. They are then given feedback on their actual performance, thereby allowing for learning effects. Their mood is induced by positive (treatment “positive”), negative (treatment “negative”) and neutral (treatment “neutral”) movie clips. There are no significant differences in the three treatments regarding absolute and relative overconfidence. However, the participants’ moods differed with regard to the occurrence of learning effects. Obvious learning effects can be established in a neutral mood when examining absolute overconfidence. These learning effects cannot be detected in positive and negative moods.

Rational expectations, difference of opinions and asset pricing

ABSTRACTThis article applies the concept of relative overconfidence (the measure of how heavily investors depend on others’ information) to combine the rational expectations equilibrium (REE) and difference of opinions (DO) models. And we discuss the effects of relative overconfidence on asset price efficiency and trading volume. We find that when investors hold assets to maturity, relative overconfidence has no effect on price efficiency and trading volume; however, when investors speculate, relative overconfidence reduces price informativeness and trading volume, because investors will reckon asset prices as more noisy and find it meaningless to speculate on capital gains based on their private information. Our results highlight the role of speculation in differentiating REE and DO models and influencing the effects of overconfidence.

Gender Diierences in Crowdfunding - Entrepreneur Overconndence and Campaign Outcomes

Crowdfunding is one of the most successful segments of the burgeoning fintech industry that might challenge the role of traditional financial intermediaries. We document a number of gender differences in crowdfunding by analyzing a near-comprehensive sample of Kickstarter campaigns launched by individual entrepreneurs in the U.S. We argue that these differences are most plausibly explained by male entrepreneurs' relative overconfidence. Suggesting a tendency to overestimate the potential demand for their products, we find that male entrepreneurs set higher goal amounts, which results in more frequent campaign failures. In contrast, female entrepreneurs' campaigns are more likely to succeed and achieve higher pledged amounts relative to campaign goals. In successive campaigns, both male entrepreneurs' goal amounts and success rates converge toward those of female entrepreneurs, consistent with entrepreneurial experience mitigating the effects of overconfidence. The results are robust to using matched control groups, alleviating the potential concern about a selection effect.

The Influence of Endogenous and Exogenous Spatial Attention on Decision Confidence

Spatial attention allows us to make more accurate decisions about events in our environment. Decision confidence is thought to be intimately linked to the decision making process as confidence ratings are tightly coupled to decision accuracy. While both spatial attention and decision confidence have been subjected to extensive research, surprisingly little is known about the interaction between these two processes. Since attention increases performance it might be expected that confidence would also increase. However, two studies investigating the effects of endogenous attention on decision confidence found contradictory results. Here we investigated the effects of two distinct forms of spatial attention on decision confidence; endogenous attention and exogenous attention. We used an orientation-matching task, comparing the two attention conditions (endogenous and exogenous) to a control condition without directed attention. Participants performed better under both attention conditions than in the control condition. Higher confidence ratings than the control condition were found under endogenous attention but not under exogenous attention. This finding suggests that while attention can increase confidence ratings, it must be voluntarily deployed for this increase to take place. We discuss possible implications of this relative overconfidence found only during endogenous attention with respect to the theoretical background of decision confidence.

Are We All Overconfident in the Long Run? Evidence from One Million Marathon Participants

AbstractIn this project, we measured overconfidence in a large, heterogeneous sample making familiar, repeated choices in a natural environment that provided direct feedback. Specifically, in study 1, we elicited predictions of own finishing time among participants of the 2012 Warsaw Marathon. The participants' prediction errors were highly correlated with the change in pace over the course of the run: overly optimistic forecasters slowed down more in the second half. In study 2, we consequently took this slowdown as a proxy for overconfidence and used existing field data of one million participants in several large marathons for which split times are available (but own predictions are not). Both studies indicate that men as well as the youngest and oldest participants tend to be more confident. In study 2, we were able to investigate national and cultural dimensions. We found confirmation of previously reported findings of relative overconfidence in Asians. Additionally, we show some largely novel results, in particular that relatively conservative societies tend to be relatively overconfident. Copyright © 2016 John Wiley & Sons, Ltd.

Gender differences in marathon pacing and performance prediction

In this study, we demonstrate that men overestimate their marathon abilities compared to women and propose that this may result from men’s relative overconfidence as well as lead men to execute suboptimal race strategy relative to women. We present a novel dataset of marathoners’ predicted finish times from the 2013 Houston Marathon. Using the runners ex-ante predictions of their own marathon finish times, we show that men consistently overestimate their abilities relative to women. Further, we find that men slow more than women in the later stages of the race and find that less even pacing is correlated with worse marathon performance, results in-line with previous studies. Finally, we argue that this poor pacing is in part explained by men’s overconfidence.

Battle of the Sexes: Gender and Marathon Race Strategy

In this study, we demonstrate that men overestimate their marathon abilities compared to women and propose that this may result from men's relative overconfidence as well as lead men to execute suboptimal race strategy relative to women. We present a novel dataset of marathoners' predicted finish times from the 2013 Houston Marathon. Using the runners’ ex-ante predictions of their own marathon finish times, we show that men consistently overestimate their abilities relative to women. Further, we find that men slow more than women in the later stages of the race and find that less even pacing is correlated with worse marathon performance, results in-line with previous studies. Finally, we argue that this poor pacing is in part explained by men's overconfidence.

Overconfidence and Social Signalling

Evidence from both psychology and economics indicates that individuals give statements that appear to overestimate their ability compared to that of others. We test three theories that predict such relative overconfidence. The first theory argues that overconfidence can be generated by Bayesian updating from a common prior and truthful statements if individuals do not know their true type. The second theory suggests that self-image concerns asymmetrically affect the choice to receive new information about one's abilities, and this asymmetry can produce overconfidence. The third theory is that overconfidence is induced by the desire to send positive signals to others about one's own skill; this suggests either a bias in judgement, strategic lying, or both. We formulate this theory precisely. Using a large data set of relative ability judgements about two cognitive tests, we reject the restrictions imposed by the Bayesian model and also reject a key prediction of the self-image models that individuals with optimistic beliefs will be less likely to search for further information about their skill because this information might shatter their self-image. We provide evidence that personality traits strongly affect relative ability judgements in a pattern that is consistent with the third theory of social signalling. Our results together suggest that overconfidence in statements is more likely to be induced by social concerns than by either of the other two factors. Copyright 2013, Oxford University Press.

Gender and corporate finance: Are male executives overconfident relative to female executives?

We examine corporate financial and investment decisions made by female executives compared with male executives. Male executives undertake more acquisitions and issue debt more often than female executives. Further, acquisitions made by firms with male executives have announcement returns approximately 2% lower than those made by female executive firms, and debt issues also have lower announcement returns for firms with male executives. Female executives place wider bounds on earnings estimates and are more likely to exercise stock options early. This evidence suggests men exhibit relative overconfidence in significant corporate decision making compared with women.

Gender and Corporate Finance: Are Male Executives Overconfident Relative to Female Executives?

We examine corporate financial and investment decisions made by female executives compared to male executives. Male executives undertake more acquisitions and issue debt more often than female executives. Further, acquisitions made by firms with male executives have announcement returns approximately 2% lower than those made by female executive firms, and debt issues also have lower announcement returns for firms with male executives. Female executives place wider bounds on earnings estimates and are more likely to exercise stock options early. This evidence suggests men exhibit relative overconfidence in significant corporate decision-making compared to women.

Overconfidence is a Social Signaling Bias

Evidence from psychology and economics indicates that many individuals overestimate their ability, both absolutely and relatively. We test three different theories about observed relative overconfidence. The first theory notes that simple statistical comparisons (for example, whether the fraction of individuals rating own skill above the median value is larger than half) are compatible (Benoit and Dubra, 2007) with a Bayesian model of updating from a common prior and truthful statements. We show that such model imposes testable restrictions on relative ability judgments, and we test the restrictions. Data on 1,016 individuals' relative ability judgments about two cognitive tests rejects the Bayesian model. The second theory suggests that self-image concerns asymmetrically affect the choice to get new information about one’s abilities, and this asymmetry produces overconfidence (Kőszegi, 2006; Weinberg, 2006). We test an important specific prediction of these models: individuals with a higher belief will be less likely to search for further information about their skill, because this information might make this belief worse. Our data also reject this prediction. The third theory is that overconfidence is induced by the desire to send positive signals to others about one’s own skill; this suggests a either a bias in judgment, strategic lying, or both. We provide evidence that personality traits strongly affect relative ability judgments in a pattern that is consistent with this third theory. Our results together suggest that overconfidence in statements is most likely to be induced by social concerns than by either of the other two factors.

Can racially unbiased police perpetuate long-run discrimination?

We develop a stylized dynamic model of highway policing in which a non-racist police officer exhibits a cognitive bias: relative overconfidence. The officer is given incentives to arrest criminals but faces a per stop cost that increases when the racial mix of her stops differs from that of the population. By observing the racial composition of jail inmates, she estimates crime rates of each race. Her overconfidence regarding eventual incarceration of criminals is shown to lead her to overestimate the crime rate of one race causing the long-run racial composition of the jail population to deviate from the “fair” one.

Women Executives and Corporate Investment: Evidence from the S&P 1500

In this paper, we examine the gender effect of top executives on corporate investment decisions. Malmendier and Tate (2005) provide a theoretical argument and empirical evidence to show that the corporate investment of overconfident CEOs is significantly more sensitive to cash flow, particularly in equity-dependent firms. Social Psychology and behavioral finance literature suggest that men in general are more overconfident than women. Using gender as a measure of relative overconfidence, we hypothesize that corporate investment of female executives should be less responsive to cash flow than corporate investment of male executives, especially among equity-dependent firms. Using the executive gender data set from the S&P 1500, we find that the evidence is consistent with our hypotheses.

Under- and Over-Reaction from Relative and Aggregate Overconfidence

This paper offers a continuous time, general equilibrium model where a risky asset is traded among risk-averse overconfident investors. Two kinds of overconfidence are introduced: investors exhibit relative overconfidence if each investor believes her model is better than others' and aggregate overconfidence if they believe signals have more information content than those in the true model. Relative overconfidence creates market price underreaction, while aggregate overconfidence generates overreaction. Excess trading volume is generated from relative overconfidence but not aggregate overconfidence. A high equity premium and excess price change volatility result from aggregate overconfidence in the early stages of investors' extrapolation of information, but not in the steady state.

Confidence and the Welfare of Less-Informed Investors

In response to recommendations by the AICPA Special Committee on Financial Reporting and the Association for Investment Management and Research, the FASB has recently invited comment regarding the question ?Given [efficient] markets, would any disservice be done to the interests of individual investors by allowing professional investors access to more extensive information?? (AICPA, 1996, p 22). Research in psychology (e.g., Griffin & Tversky, 1992) suggests that less-informed investors may suffer from overconfidence and trade too aggressively given their information. This paper reports two experiments designed to address these issues. In both experiments, security values are determined by the price/book ratios of actual firms, ?more-informed? investors observe three value-relevant financial ratios derived from Value-Line reports, and ?less-informed? investors observe only one of those signals. Experiment 1 provides evidence from a pencil-and-paper task that less-informed investors are overconfident relative to their more-informed counterparts, and that this relative overconfidence is reduced by alerting investors to the extent of their informational disadvantage. Trading behavior follows the same pattern as confidence assessments. Experiment 2 provides evidence from laboratory markets that, even after market prices have stabilized after many rounds of trading, less-informed investors systematically transfer wealth to more-informed investors as a result of biased prices and overly aggressive trading, but that alerting less-informed investors to the extent of their informational disadvantage eliminates these welfare losses. The results of both experiments thus suggest that providing information to only professional investors could harm the welfare of less-informed investors if less-informed investors are not aware of the extent of their informational disadvantage.