Skala, Dorota (2008): Overconfidence in Psychology and Finance – an Interdisciplinary Literature Review. Published in: Bank i Kredyt , Vol. April, No. 4 : pp. 33-50.
Download (262kB) | Preview
This paper reviews the literature on one of the most meaningful concepts in modern behavioural finance, the overconfidence phenomenon. Overconfidence is presented as a well-developed psychological theory, with main facets comprising miscalibration, betterthan- average effect, illusion of control and unrealistic optimism. The primary applications of overconfidence in contemporary finance are analysed, from the perspective of financial markets and corporate behaviour. Experimental studies, formal models and analyses of market data demonstrate that overconfidence at least partially solves some financial market puzzles that cannot be accounted for by standard economic theory. Overconfidence in the corporate context may affect not only a company’s internal financing structure, but also its interactions with other market participants through merger and acquisition activity.
|Item Type:||MPRA Paper|
|Original Title:||Overconfidence in Psychology and Finance – an Interdisciplinary Literature Review|
|Keywords:||overconfidence, behavioral finance, investor psychology, financial markets, corporate policies, overconfident investors|
|Subjects:||D - Microeconomics > D0 - General > D03 - Behavioral Economics; Underlying Principles
G - Financial Economics > G0 - General > G00 - General
|Depositing User:||Dorota Skala|
|Date Deposited:||06. Nov 2010 10:09|
|Last Modified:||11. Feb 2013 17:51|
Alicke M.D., Klotz M.L., Breitenbecher D.L., Yurak T.J., Vredenburg D.S. (1995), Personal Contact, Individuation and the Better-Than-Average Effect, “Journal of Personality and Social Psychology”, Vol. 68, No. 5, pp. 804–825.
Ayton P., McClelland A. (1997), How Real is Overconfidence?, “Journal of Behavioral Decision Making”, Vol. 10, No. 3, pp. 279-285.
Babcock L., Loewenstein G. (1997), Explaining Bargaining Impasse: The Role of Self-Serving Biases, “Journal of Economic Perspectives”, Vol. 11, No. 1, pp. 109–126.
Barber B., Odean T. (2000), Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors, “Journal of Finance”, Vol. 55, No. 2, pp. 773–806.
Barber B., Odean T. (2001), Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment, “The Quarterly Journal of Economics”, Vol. 116, No. 1, pp. 261–292.
Ben-David I., Graham J.R., Harvey C.R. (2007), Managerial Overconfidence and Corporate Policies, “AFA 2007 Chicago Meetings Paper”, November, http://ssrn.com/abstract=890300
Benoit J-P., Dubra J. (2007), Overconfidence?, “MPRA Paper”, No. 6017, http://mpra.ub.uni-muenchen.de/6017/
Benos A.V. (1998), Aggressiveness and survival of overconfident traders, “Journal of Financial Markets”, Vol. 1, No. 3–4, pp. 353–383.
Bernardo A., Welch I. (2001), On the Evolution of Overconfidence and Entrepreneurs, “Journal of Economics and Management Strategy”, Vol. 10, No. 3, pp. 301–330.
Beyer P. (1990), Gender Differences in the Accuracy of Self-Evaluations of Performance, “Journal of Personality and Social Psychology”, Vol. 59, No. 5, pp. 960–970.
Beyer S., Bowden E. (1997), Gender Differences in Self-Perceptions: Convergent Evidence from Three Measures Accuracy and Bias, “Personality and Social Psychology Bulletin”, Vol. 23, No. 2, pp. 157–172.
Biais B., Hilton D., Mazurier K., Pouget S. (2005), Judgemental Overconfidence, self-monitoring and trading performance in an experimental financial market, “Review of Economic Studies”, Vol. 72, No. 251, pp. 287–312.
Brenner L.A., Koehler D.J., Liberman V., Tversky A. (1996), Overconfidence in Probability and Frequency Judgments: A Critical Examination, “Organizational Behavior and Human Decision Processes”, Vol. 65, No. 3, pp. 212–219.
Brenner L., Griffin D. (2004), Perspectives on Probability Judgment Calibration, in: D.J. Koehler, N. Harvey (eds.), Blackwell Handbook of Judgement and Decision Making, Blackwell Publishing, Oxford.
Camerer C., Lovallo D. (1999), Overconfidence and Excess Entry: An Experimental Approach, “American Economic Review”, Vol. 89, No. 1, pp. 306–318.
Chuang W.-I., Lee B.-S. (2006), An empirical evaluation of the overconfidence hypothesis, “Journal of Banking and Finance”, Vol. 30, No. 9, pp. 2489–2515.
Daniel K., Hirshleifer D., Subrahmanyam A. (1998), Investor Psychology and Security Market Under- and Overreactions, “Journal of Finance”, Vol. 53, No. 6, pp. 1839–1885.
Daniel K., Hirshleifer D., Subrahmanyam A. (2001), Overconfidence, Arbitrage, and Equilibrium Asset Pricing, “Journal of Finance”, Vol. 56, No. 3, pp. 921–965.
Dawes R., Mulford M. (1996), The False Consensus Effect and Overconfidence: Flaws in Judgment or Flaws in How We Study Judgment?, “Organizational Behavior and Human Decision Processes”, Vol. 65, No. 3, pp. 201–211.
Deaves R., Luders E., Schroder M. (2005), The Dynamics of Overconfidence: Evidence from Stock Market Forecasters, “Discussion Paper”, No. 05-83, Centre for European Economic Research (ZEW), Mannheim, ftp://ftp.zew.de/pub/zew-docs/dp/dp0583.pdf
De Bondt W.F. (1998), A portrait of the individual investor, “European Economic Review”, Vol. 42, No. 3-5, pp. 831–844.
De Long B.J., Shleifer A., Summers L.H., Waldmann R. (1990), Noise Trader Risk in Financial Markets, “Journal of Political Economy”, Vol. 99, No. 4, pp.703–738.
De Long, B.J., Shleifer, A., Summers, L.H., Waldmann, R. (1991,) The survival of noise traders in financial markets, “Journal of Business”, Vol. 64, No. 1, pp. 1–19.
Dunning D., Meyerowitz J.A., Holzberg A.D. (1989), Ambiguity and Self-Evaluation: The Role of Idiosyncratic Trait Definitions in Self-Serving Assessments of Ability, “Journal of Personality and Social Psychology”, Vol. 57, No. 6, pp. 1082–1090.
Fama E., (1998), Market efficiency, long-term returns, and behavioral finance, “Journal of Financial Economics”, Vol. 49, No. 3, pp. 283–306.
Fischhoff B., Lichtenstein S., Slovic P. (1977), Knowing with Certainty: The Appropriateness of Extreme Confidence, “Journal of Experimental Psychology”, Vol. 3, No. 4, pp. 552–564.
Fischhoff B., Koriat A., Lichtenstein S. (1980), Reasons for Confidence, “Journal of Experimental Psychology: Human Learning and Memory”, Vol. 6, No. 2, pp. 107–118.
Friesen G., Weller P.A. (2006), Quantifying cognitive biases in analyst earnings forecasts, “Journal of Financial Markets”, Vol. 9, No. 4, pp. 333–365.
Gervais S., Odean T. (2001), Learning to Be Overconfident, “The Review of Financial Studies”, Vol. 14, No. 1, pp. 1–27.
Gigerenzer G., Hoffrage U., Kleinbolting H. (1991), Probabilistic Mental Models: A Brunswikian Theory of Confidence, “Psychological Review”, Vol. 98, No. 4, pp. 506–528.
Glaser M., Weber M. (2005), Overconfidence of Professionals and Lay Men: Individual Differences Within and Between Tasks?, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=712583
Glaser M., Weber M. (2007), Overconfidence and Trading Volume, “The Geneva Risk and Insurance Review”, Vol. 32, No. 1, pp. 1–36.
Griffin D., Tversky A. (1992), The Weighing of Evidence and the Determinants of Confidence, “Cognitive Psychology”, Vol. 24, No. 3, pp. 411–435.
Griffin D., Varey C. (1996), Towards a Consensus on Overconfidence, “Organizational Behavior and Human Decision Processes”, Vol. 65, No. 3, pp. 227-231.
Heaton J.B. (2002), Managerial Optimism and Corporate Finance, “Financial Management”, Vol. 31, No. 2, p. 33–45.
Hilary G., Menzly L. (2006), Does Past Success Lead Analysts to Become Overconfident?, “Management Science”, Vol. 52, No. 4, pp. 489–500.
Hirshleifer D., Luo G. Y. (2001), On the survival of overconfident traders in a competitive securities market, “Journal of Financial Markets”, Vol. 4, No. 1, pp. 73–84.
Juslin P. (1994), The Overconfidence Phenomenon as a Consequence of Informal Experimenter-Guided Selection of Almanac Items, “Organizational Behavior and Human Decision Processes”, Vol. 57, No. 2, pp. 226–246.
Juslin P., Olsson H., Bjorkman M. (1997), Brunswikian and Thurstonian origins of bias in probability assessment: On the interpretation of stochastic components of judgements, “Journal of Behavioral Decision Making”, Vol. 10, No. 3, pp. 189–209.
Kahneman D., Lovallo D. (1993), Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking, “Management Science”, Vol. 39, No. 1, pp. 17–31.
Kahneman D., Tversky A. (1982), Heuristics and biases, in: D. Kahneman, P. Slovic, A. Tversky (eds.), Judgement Under Uncertainty: Heuristics and Biases, Cambridge University Press, Cambridge.
Keren G. (1991), Calibration and probability judgements: Conceptual and methodological issues, “Acta Psychologica”, Vol. 77, No. 3, pp. 217–273.
Keren G. (1997), On The Calibration of Probability Judgments: Some Critical Comments and Alternative Perspectives, “Journal of Behavioral Decision Making”, Vol. 10, No. 3, pp. 269–278.
Koehler D.J., Brenner L., Griffin D. (2002), The Calibration of Expert Judgment: Heuristics and Biases Beyond the Laboratory, in: T. Gilovich, D. Griffin and D. Kahneman (eds.), Heuristics and Biases: The Psychology of Intuitive Judgement, Cambridge University Press, Cambridge.
Kyle A.S., Wang F.A. (1997), Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?, “Journal of Finance”, Vol. 52, No.5, pp. 2073–2090.
Langer E.J., Roth J. (1975), Heads I Win, Tails It’s Chance: The Illusion of Control as a Function of the Sequence of Outcomes in a Purely Chance Task, “Journal of Personality and Social Psychology”, Vol. 32, No. 6, pp. 951-955.
Langer E.J. (1975), The Illusion of Control, “Journal of Personality and Social Psychology”, Vol. 32, No. 2, pp. 311–328.
Lichtenstein S., Fischhoff B., Philips L. (1982), Calibration of probabilities: The state of the art to 1980, in: D. Kahneman, P. Slovic, A. Tversky (eds.), Judgement Under Uncertainty: Heuristics and Biases, Cambridge University Press, Cambridge.
Lundeberg M., Fox P., Punccohar J. (1994), Highly Confident but Wrong: Gender Differences and Similarities in Confidence Judgments, “Journal of Educational Psychology”, Vol. 86, No. 1, pp. 114–121.
Maciejovsky B., Kirchler E. (2002), Simultaneous over- and underconfidence: Evidence from experimental asset markets, “Journal of Risk and Uncertainty”, Vol. 25, No. 1, pp. 65–85.
Malmendier U., Tate G. (2005), CEO Overconfidence and Corporate Investment, “Journal of Finance”, Vol. 60, No. 6, pp. 2661–2700.
Malmendier U., Tate G. (2006), Who makes acquisitions? CEO Overconfidence and the Market’s Reaction, http://www.econ.berkeley.edu/~ulrike/research.html
March J., Shapira Z. (1987), Managerial Perspectives on Risk and Risk Taking, “Management Science”, Vol. 33, No. 11, pp. 1404–18.
Odean T. (1998), Volume, Volatility, Price and Profit When All Traders Are Above Average, “Journal of Finance”, Vol. 53, No. 6, p. 1887–1934.
Odean T. (1999), Do Investors Trade Too Much?, “American Economic Review”, Vol. 89, No. 5, pp. 1279–1298.
Oskamp S. (1965), Overconfidence in Case-Study Judgments, “Journal of Consulting Psychology”, Vol. 29, No. 3, pp. 261–265.
Presson P.K., Benassi V.A. (1996), Illusion of Control: A Meta-Analytic Review, “Journal of Social Behavior and Personality”, Vol. 11, No. 3, pp. 493-510.
Roll R. (1986), The Hubris Hypothesis of Corporate Takeovers, “Journal of Business”, Vol. 59, No. 2, pp. 197–216.
Russo J., Schoemaker P. (1992), Managing Overconfidence, “Sloan Management Review” Vol. 33, No. 2, pp. 7-17.
Shefrin H., Statman M. (1985), The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence, “Journal of Finance”, Vol. 40, No. 3, pp. 777–790.
Soll J.B. (1996), Determinants of overconfidence and miscalibration: The roles of random error and ecological structure, “Organizational Behavior and Human Decision Processes”, Vol. 65, No. 2, pp. 117–137.
Statman M., Thorley S., Vorkink K. (2003), Investor overconfidence and trading volume, “AFA 2004 San Diego Meetings Paper”, March, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=168472
Svenson O. (1981), Are We All Less Risky and More Skilful Than Our Fellow Drivers?, “Acta Psychologica”, Vol. 47, No. 2, pp. 143-48.
Taylor S., Brown J.D. (1988), Illusion and Well-Being: A Social Psychological Perspective on Mental Health, “Psychological Bulletin”, Vol. 103, No. 2, pp. 193–210.
Wallsten T.S. (1996), An Analysis of Judgment Research Analyses, “Organizational Behavior and Human Decision Processes”, Vol. 65, No. 3, pp. 220–226.
Weinstein N.D. (1980), Unrealistic Optimism About Future Life Events, “Journal of Personality and Social Psychology”, Vol. 39, No. 5, pp. 806–820.