A short test for overconfidence and prospect theory. An experimental validation

Peon, David and Calvo, Anxo and Antelo, Manel (2014): A short test for overconfidence and prospect theory. An experimental validation.

Abstract

Two relevant areas in the behavioral economics are prospect theory and overconfidence. Many tests are available to elicit their different manifestations: utility curvature, probability weighting and loss aversion in prospect theory; overestimation, overplacement and overprecision as measures of overconfidence. Those tests are suitable to deal with single manifestations but often unfeasible, in terms of time to be performed, to determine a complete psychological profile of a given respondent. In this paper we provide two short tests, based on classic works in the literature, to derive a complete profile on prospect theory and overconfidence. Then, we conduct an experimental research to validate the tests, revealing they are broadly efficient to replicate the regular results in the literature. Nonetheless, some enhancements are suggested as well. Finally, the experimental analysis of all measures of overconfidence and prospect theory using the same sample of respondents allows us to provide new insights on the relationship between these two areas.

• Item Type: MPRA Paper
• Language: English
• Keywords: Experimental economics, overconfidence, prospect theory, behavioral finance, utility measurement, overestimation, overplacement, overprecision
• Subjects: C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior; D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty

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