Overconfidence in investment decisions: An experimental approach
Authors: Dittrich, Dennis1; Güth, Werner1; Maciejovsky, Boris2
Source: The European Journal of Finance, Volume 11, Number 6, Number 6/December 2005 , pp. 471-491(21)
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Abstract:
By experimentally inducing risk aversion, overconfidence in an investment setting is investigated, comparing the evaluation of actual investment decisions with alternative choices. After selecting their own investment, subjects confront three alternative investment choices, including the optimal one, and are asked about their willingness to pay and to substitute their own for alternative choices. Overconfidence is defined as the persistent overevaluation of the own investment decision. Results indicate that overconfidence increases (i) with the absolute deviation from optimal choices, (ii) with task complexity involving the number of risky assets, and (iii) decreases with individual perceived uncertainty.Keywords: Risky decision making; behavioural finance; portfolio choice; experimental economics
Document Type: Research article
DOI: 10.1080/1351847042000255643
Affiliations: 1: Max Planck Institute for Research into Economic Systems, Strategic Interaction Group, Germany 2: Massachusetts Institute of Technology, Sloan School of Management, USA
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