Role Of Overconfidence Research Articles

Role of Overconfidence as a Mediator between Behavioral Biases and Investment Decisions in Life Insurance

Role of Overconfidence as a Mediator between Behavioral Biases and Investment Decisions in Life Insurance

Entrepreneurship, Management, and Cognitive Reflection: A Preregistered Replication Study With Extensions

Intuition is a central element of entrepreneurial decision-making. We conceptually replicate a published study by using new representative data from 1961 adults and the widely used Cognitive Reflection Test, which assesses the ability to avoid intuitive decisions and to switch to an analytical process. We extend the analysis by exploring occupational sorting versus environmental influence as mechanisms, the role of overconfidence, and heterogeneity. Our results confirm that entrepreneurs do not resist intuitive (but potentially wrong) decisions as much as hired managers do. Our extensions suggest that this difference is not fully explained by occupational sorting, but partially by overconfidence.

Who invests in cryptocurrency? The role of overconfidence among American investors

Cryptocurrency has received increasing attention due to its uniqueness among financial assets, and the characteristics of crypto investors have recently gained much interest. The present study aims to examine the linkage between financial confidence and cryptocurrency ownership. Using the representative sample of American investors, we find that financially overconfident investors are nearly 8 % more likely to be crypto owners and 10 % more likely to be probable crypto owners as compared to underconfident investors. Our findings are robust to sample selection bias and help in understanding the characteristics of crypto owners in terms of financial confidence. Based on these findings, regulators and policymakers may raise awareness about the overconfidence bias among existing and potential crypto investors.

Executive gender, age, and corporate financial decisions and performance: The role of overconfidence

This paper analyzes the interactive effects of executive gender and age on corporate financial decisions and performance using a sample of non-financial US-listed firms. The analysis finds that firms run by young male executives have the worst operating performance, although they raise more external funds and invest more than firms run by old male, young female, and old female executives. Firms run by old female executives have the best operating performance, although they invest the least. Further analysis demonstrates that these variations in decisions and performance are due to differences in executives’ overconfidence levels that affect the quality of their investments and, subsequently, their operating performance. The analysis also finds that overconfidence drives risk-taking, suggesting that these two behaviors are not independent of each other, as some researchers claim. However, we find, on average, insignificant differences in firm values among the executive groups due to the different leverage levels employed by them that offset the differences in their operating performance. But at firms that set their leverage ratio close to their target, such that leverage differentials among these firms do not lead to significant differences in their values, old female executives emerge again as the best value creators, followed by young female and old male executives.

The gender gap in top jobs – The role of overconfidence

There is a large gender gap in the probability of being in a “top job” in mid-career. Top jobs bring higher earnings, and also have more job security and better career trajectories. Recent literature has raised the possibility that some of this gap may be attributable to women not “leaning in” while men are more overconfident in their abilities. We use longitudinal data from childhood into mid-career and construct a measure of overconfidence using multiple measures of objective cognitive ability and subjective estimated ability. Our measure confirms previous findings that men are more overconfident than women. We then use linear regression and decomposition techniques to account for the gender gap in top jobs including our measure of overconfidence. Our results show that men being more overconfident explains 5–11 percent of the gender gap in top job employment. This indicates that while overconfidence matters for gender inequality in the labor market and has implications for how firms recruit and promote workers, other individual, structural, and societal factors play a larger role.

The Role of Overconfidence and Responsibility in Escalation of Commitment in New Product Development

When new product development shows signs of failure, decision makers often face a difficult dilemma: either to cancel the project or to continue investing resources, hoping for success. On many occasions, managers choose to persist with their investments beyond a point that could be considered rational, a phenomenon that has been called escalation of commitment. To understand what drives individuals to escalate commitment, we conducted a randomized experiment investigating three predicting factors: overconfidence arising from past correct decisions, overconfidence arising from how probability information is presented, and responsibility. Our paper contributes to the literature by showing that correct decisions do not necessarily lead to overconfidence or escalated commitment. Instead, it is only when a correct decision leads to a positive outcome that escalation of commitment occurs. Regarding overconfidence arising from how probability information is presented, we found that when statistical information is framed in a positive way, individuals become more overconfident but that overconfidence does not translate into higher escalation of commitment. Our results indicate that knowing that an individual is overconfident is not enough to predict whether they will escalate their commitment; we also need to know the source of this overconfidence. In the case of responsibility, we find a connection between felt responsibility for the project and escalation of commitment to it.

Exploring market overreaction, investors’ sentiments and investment decisions in an emerging stock market

The representative heuristic and overconfidence are cognitive biases that influence the decisions of the investors in the stock market. Overconfident investors tend to rely on representative heuristic for decision making under uncertainty. Investors overestimate their knowledge and think that past performance is the best indicator to measure the future performance of a company. Investors who are overconfident and use representative heuristics overreact to any new information that arrives in the market, and it affects their decisions. To measure the presence of overconfidence and representative heuristic in decisions making of investors trading at Pakistan Stock Exchange (PSX), we have used primary as well as stock market secondary data. Primary data was collected from 446 retail investors, and secondary data was collected from 301 companies listed in 35 sectors of PSX. We have found a significant effect of overconfidence and representative heuristic on the decision making of investors and the trade volume of the stock market. This paper adds to the literature of behavioral finance concerning the role of overconfidence as a mediator between representative heuristic and investment decisions. The evidence documented in this paper is first known to measure the role of mediator between representative heuristic and investment decisions.

The Big Market Delusion: Valuation and Investment Implications

In entrepreneurs’ minds, big markets offer the promise of easily scalable revenues that, coupled with profitability, can translate into large profits. This article examines how the “big market promise” affects business formation and financing, with a focus on the role of overconfidence on the part of both entrepreneurs and their financiers (venture capitalists and public equity) in creating a collective overpricing of companies in alleged big markets—and an inevitable correction. Three case studies illustrate this thesis—one in which the process has fully played out (1990s dot-com retail), one in which it has been unfolding for a while (online advertising), and one in which it is just beginning (the cannabis market). We suggest several lessons for investors, regulators, and businesses based on these case studies.

The Role of Overconfidence and Past Investment Experience in Herding Behaviour with a Moderating Effect of Financial Literacy: Evidence from Pakistan Stock Exchange

The most stimulating task for investors is to make rational investment decisions.Normally, investors indulge in behavioural biases in uncertain situations. Numerous cognitive factors influence investors during decision making for investment and lead towards herding the acts of others. The core objective of this study is to investigate the influence of overconfidence and past investment experience on the herding behaviour of individual investors participating in the Pakistan stock exchange. To accomplish this aim, researcher used a quantitative research method and a cross-sectional research design. Data was collected from 352 individual investors participating in Pakistan stock exchange via survey questionnaires. A partial least square (PLS) was used to assess the measurement model and structural equation model. Additionally, the study examines the moderating effect of financial literacy on the relationship of overconfidence and past investment experience with the herding behaviour of individual investors. The results provided strong evidence that both overconfidence and past investment experience motivate investors towards herding behaviour. It was found that financial literacy has a moderate impact on the relationship between the cognitive profile and herding behaviour. This study contributes to behavioural finance literature and provides empirical evidence that the cognitive factors of investors are significant predictors of herding behaviour of investors. The study offers new empirical insights of investors’ behaviour due to the cognitive characteristics in Pakistan stock market.

Etude Empirique De L’effet Du Comportement D’exces De Confiance Sur La Volatilite Du Marche Boursier Marocain

The purpose of this paper is to measure whether the investor operating on the Casablanca Stock Exchange displays a behavior of overconfidence, and to examine, under this hypothesis, the role of overconfidence in the explanation of fluctuations in the value of the MASI benchmark index over a 16-year period from 2002 to 2017. Using the econometric techniques in terms of causality and conditional volatility modeling, the results of this research show the presence of the overconfidence behavior and the positive effect of the latter on the conditional volatility of the monthly return of the MASI index.

Overconfidence and Risk Behavior: The Mediating Role of Risk Propensity and Risk Perception

Cognitive biases have recently received enormous attention from entrepreneurship scholars. A growing number of studies have particularly focused on the role of overconfidence in the entrepreneurship decision-making literature. However, it remains unclear ‘how’ entrepreneurial risk behavior is influenced by overconfidence. Building on both information-processing theory and upper echelons theory, we propose two mechanisms that mediate the relationship between overconfidence and risk behavior: the cognitive process of risk perception (‘what entrepreneurs see’) and the personality trait of risk propensity (‘who entrepreneurs are’). By aggregating over 25 years of research with the help of meta-analytical structural equation modeling (MASEM), our results reveal a full mediation through risk perception and risk propensity. Interestingly, overconfident entrepreneurs tend to engage in risk behavior particularly because they do not perceive (or ‘see’) them as such. Our study thus contributes to prior research by uncovering two mechanisms that help to better understand entrepreneurial risk behavior.

Curbing Managerial Myopia: The Role of Managerial Overconfidence in Owner-Managed Firms and Professionally Managed Firms

We develop and test a model in which managerial overconfidence offsets the underinvestment problem arising from managerial myopia. Using a three-period investment model in which we capture managerial myopia by hyperbolic discounting, we show that both overconfident owner-managers and professional managers who have myopic preferences can enhance firm value (up to a point) by increasing investment. This value-enhancing role of overconfidence is more evident for professional managers than for owner-managers. The results from simulation and empirical analyses support the model’s predictions. Thus, while managers’ cognitive biases, when considered separately, negatively impact firm performance, they can be beneficial when considered jointly.

"Contextualization: Role of Overconfidence, Perspective-taking and Communication Complexity"

Contextualization can be important with respect to reducing misunderstandings. In the cost-benefit model of contextualization, it is assumed that people contextualize when perspectives are differen...

The Role of Overconfidence in Romantic Desirability and Competition.

Four studies and a computer simulation tested the hypothesis that people who are overconfident in their self-assessments may be more successful in attracting mates. In Study 1, overconfident people were perceived as more confident in their dating profiles, and this perceived confidence predicted increased romantic desirability. Study 2 revealed that overconfident people also tend to be perceived as arrogant, which counteracts the positive effects of perceived confidence. However, Study 3 revealed that overconfidence might confer an advantage in intrasexual competition, as people were less likely to compete with overconfident individuals by virtue of their perceived confidence and arrogance. Study 4 showed that overconfident raters were also more likely to choose to compete for romantic partners. In Study 5, agent-based modeling incorporating the coefficients from these studies suggested that overconfidence facilitates mate acquisition in the presence of intrasexual competition.

Behavioral Differences Between Founder CEOs And Professional CEOs: The Role Of Overconfidence

We provide evidence based on a sample of large S&P 1500 companies that founder CEOs are more overconfident than their non-founder counterparts (professional CEOs). We approximate overconfidence v...

Behavioral Differences between Founder CEOS and Professional CEOS: The Role of Overconfidence

We provide evidence that founder CEOs of large SP they are also more likely to perceive their firm to be undervalued as implied by their option-exercise behavior. To date, investors appear unaware of the “overconfidence bias” among founders.

"Media Richness, Contextualization and Team Performance: The Moderating Role of Overconfidence"

In this study we explore the influence of contextualization, media richness, and overconfidence on performance. We hypothesize that more overconfidence will lead to less contextualization, even whe...

Overconfidence in Political Behavior

This paper studies, theoretically and empirically, the role of overconfidence in political behavior. Our model of overconfidence in beliefs predicts that overconfidence leads to ideological extremeness, increased voter turnout, and stronger partisan identification. The model also makes nuanced predictions about the patterns of ideology in society. These predictions are tested using unique data that measure the overconfidence and standard political characteristics of a nationwide sample of over 3,000 adults. Our numerous predictions find strong support in these data. In particular, we document that overconfidence is a substantively and statistically important predictor of ideological extremeness, voter turnout, and partisan identification. (JEL C83, D03, D72, D83)

Calibration and confidence: Where to next?

One of the key feedback questions is “where to next?” and this article provides some directions as to where to next for research based on a review of the five articles in this special issue. The directions relate to the critical importance of calibration, the multidimensionality of calibration, the relation of calibration to self-regulation strategies, whether calibration is specific to the task or more general within the student, how to measure calibration, how much confidence should be given to partial knowledge when calibrating, the role of overconfidence and knowing “when one does not know”, and how to improve the accuracy of judgments.

A theoretical approach to the demand and supply for peacekeeping

The post-cold war period is characterized by peace operations and negotiations, with increased size, number, and intensity of external interventions, particularly those sponsored by multilateral organizations. This article examines some factors that influence the demand for peacekeeping missions, i.e., conflict situations that invite third-party interventions, as well as the supply of peacekeeping, the ability and desire of states to intervene elsewhere through peacekeeping missions. On the demand side, a framework is developed that synthesizes the main obstacles to peacekeeping intervention, in particular the role of overconfidence, and explains how interpersonal preferences, such as the desire for vengeance, contribute to conflict escalation. On the supply side, the article explains some of the conditions determining countries' contribution to peace missions.