Financial Overconfidence Over Time
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Financial Overconfidence Over Time
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Author : Christoph Merkle
language : en
Publisher:
Release Date : 2017
Financial Overconfidence Over Time written by Christoph Merkle and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.
Overconfidence leads to increased trading activity, higher risk taking, and less diversification. In a panel survey of online brokerage clients, we ask for stock market and portfolio expectations and derive several overconfidence measures from the responses. Overconfidence is present in our sample in various forms. By matching survey data with investors' actual transactions and portfolio holdings, we find an influence of overplacement on trading activity, of overprecision and overestimation on diversification, and of overprecision and overplacement on risk taking. We explore the evolution of overconfidence over time and identify a role of past success and hindsight on subsequent overconfidence in line with learning to be overconfident.
Overconfidence In Financial Markets And Consumption Over The Life Cycle
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Author : Frank Caliendo
language : en
Publisher:
Release Date : 2019
Overconfidence In Financial Markets And Consumption Over The Life Cycle written by Frank Caliendo and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
Overconfidence is a widely documented phenomenon. Empirical evidence reveal two types of overconfidence in financial markets: investors both overestimate the average rate of return to their assets and underestimate uncertainty associated with the return. This paper explores implications of overconfidence in financial markets for consumption over the life cycle. The authors obtain a closed-form solution to the time-inconsistent problem facing an overconfident investor/consumer who has a CRRA utility function. They use this solution to show that overestimation of the mean return gives rise to a hump in consumption during the work life if and only if the elasticity of intertemporal substitution in consumption is less than unit. They find that underestimation of uncertainty has little effect on the long-run average behavior of consumption over the work life. Their calibrated model produces a hump-shaped work-life consumption profile with both the age and the amplitude of peak consumption consistent with empirical observations.
True Overconfidence In Interval Estimates
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Author : Markus Glaser
language : en
Publisher:
Release Date : 2012
True Overconfidence In Interval Estimates written by Markus Glaser and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2012 with categories.
Overconfidence is often regarded as one of the most prevalent judgment biases. Several studies show that overconfidence can lead to suboptimal decisions of investors, managers, or politicians. Recent research, however, questions whether overconfidence should be regarded as a bias and shows that standard quot;overconfidencequot; findings can easily be explained by different degrees of knowledge of agents plus a random error in predictions. We contribute to the current literature and ongoing research by extensively analyzing interval estimates for knowledge questions, real financial time series, and for artificially generated charts. We thereby suggest a new method to measure overconfidence in interval estimates which is based on the implied probability mass behind a stated prediction interval. We document overconfidence patterns which are difficult to reconcile with rationality of agents and which cannot be explained by differences in knowledge as differences in knowledge do not exist in our task. Furthermore, we show that overconfidence measures are reliable in the sense that there exist stable individual differences in the degree of overconfidence in interval estimates, thereby testing an important assumption of behavioral economics and behavioral finance models: stable individual differences in the degree of overconfidence across people. We do this in a quot;field experiment,quot; for different levels of expertise of subjects (students on the one hand and professional traders and investment bankers on the other hand), over time, by using different miscalibration metrics, and for tasks which avoid common weaknesses like a non-representative selection of trick questions.
Behavioral Finance And Wealth Management
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Author : Michael M. Pompian
language : en
Publisher: John Wiley & Sons
Release Date : 2011-01-31
Behavioral Finance And Wealth Management written by Michael M. Pompian and has been published by John Wiley & Sons this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011-01-31 with Business & Economics categories.
"Pompian is handing you the magic book, the one that reveals your behavioral flaws and shows you how to avoid them. The tricks to success are here. Read and do not stop until you are one of very few magicians." —Arnold S. Wood, President and Chief Executive Officer, Martingale Asset Management Fear and greed drive markets, as well as good and bad investment decision-making. In Behavioral Finance and Wealth Management, financial expert Michael Pompian shows you, whether you're an investor or a financial advisor, how to make better investment decisions by employing behavioral finance research. Pompian takes a practical approach to the science of behavioral finance and puts it to use in the real world. He reveals 20 of the most prominent individual investor biases and helps you properly modify your asset allocation decisions based on the latest research on behavioral anomalies of individual investors.
Experimental Studies Of Overconfidence In Financial Markets
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Author : Julija Michailova
language : en
Publisher:
Release Date : 2010
Experimental Studies Of Overconfidence In Financial Markets written by Julija Michailova and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2010 with categories.
A Measure Of Overconfidence
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Author : Malte Schulz
language : en
Publisher:
Release Date : 2012
A Measure Of Overconfidence written by Malte Schulz and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2012 with categories.
Overconfidence is usually measured for specific occupational groups such as students or professional investors. Hence, it is unclear in how far the bias affects the decision-making of the general population. Consequently, this study aims at achieving a measure that is more representative for the whole population. Overconfidence is measured based on a sample of 123 subjects not selected for affiliation to certain professional groups. Three different measurement methods are applied in order to determine if they yield similar results and conclusions. The majority of subjects is overconfident, which shows that the bias is not only a phenomenon of certain groups of people but that it might impact the decisions of the general population as well. Gender differences are mostly insignificant. The level of overconfidence varies depending on the measurement method and correlations between their results are low. Consequently, it is concluded that different measures are needed to get a concise impression of a person’'s level of overconfidence. From a financial point of view, it is argued that overconfidence measures should be included in financial advisory processes to make people aware of the potentially adverse impact overconfidence might have. Only if people know about the bias, they are able to adjust their behavior accordingly in order to make better decisions.
Household Portfolios
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Author : Luigi Guiso
language : en
Publisher: MIT Press
Release Date : 2002
Household Portfolios written by Luigi Guiso and has been published by MIT Press this book supported file pdf, txt, epub, kindle and other format this book has been release on 2002 with Business & Economics categories.
Theoretical and empirical analysis of the structure of household portfolios.
Three Essays On Investor Confidence
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Author : Christoph Meier
language : en
Publisher:
Release Date : 2017
Three Essays On Investor Confidence written by Christoph Meier and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with Investmensts categories.
This PhD research is committed to contributing to the literature on investor overconfidence, one of the most robust findings in the field of behavioural finance. Overconfidence, a cognitive bias where decision makers tend to be overly optimistic not only about their aptitudes and skills, but also about the precision of their forecasts and information, is associated with poor decision making. Individuals suffering from overconfidence tend to be excessive stock traders, Chief Executive Officers (CEOs) who rush into mergers and acquisitions, risky drivers, naïve entrepreneurs and sloppy retirement planners. The literature yields the many attempts to link stock market phenomena to overconfidence. However, existing measures that have been used to test these hypotheses are typically only loosely related to the overconfidence of investors in their own abilities, or use proxies that lack a formal model of cognitive psychology. In the first of three research projects, I propose a measure of aggregate investor confidence that is based on a cross-disciplinary model containing determinants of confidence. The measure captures major economic events intuitively, and is statistically distinct from exiting proxies. Using a 1926-2011United States (US) sample, I find that the new measure is a better predictor of aggregate trading activity than past stock returns, which have been used in prior studies.The second research project explores the role of aggregate investor confidence in asset pricing factors. Empirical tests reveal interesting patterns. Firstly, and in line with a behavioural model by Daniel, Hirshleifer, and Subrahmanyam (1998), aggregate investor confidence partially explains variations in the profitability of momentum strategies. Additionally, aggregate investor confidence appears to play a key role in the size factor, complementing an early hypothesis by Roll (1981). Indeed, investors seem to systematically change their risk perceptions which ultimately impacts on market outcome. The third research project takes a qualitative stance. Using a new methodology proposed by Glaser, Langer, and Weber (2013), we utilise the ability to assess time series variations of individual overconfidence levels in an experimental asset market. We find that arriving signals that strongly support prior decisions cause overconfidence to prevail, while strongly opposing signals cause the effect to vanish 'overconfidence crashes'. However, previously lost overconfidence can re-emerge when these opposing signals reverse .Additionally, we find strong evidence in favour of the hypothesis by Hongaund Stein (2007) which states that investors interpret arriving information differently with opposing feedback having particularly strong effects. We also find measurement bias in the methodology proposed by Glaser et al. (2013). This is consistent with methodological concerns documented by Langnickeland Zeisberger (2016) and Biais, Hilton, Mazurier, and Pouget (2005) who report that assessment tasks using confidence intervals typically yield inflated overconfidence scores, as individuals tend to be insensitive to confidence levels in their estimations.
Managerial Overconfidence And Corporate Policies
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Author : Itzhak Ben-David
language : en
Publisher:
Release Date : 2007
Managerial Overconfidence And Corporate Policies written by Itzhak Ben-David and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2007 with Chief financial officers categories.
Miscalibration is a standard measure of overconfidence in both psychology and economics. Although it is often used in lab experiments, there is scarcity of evidence about its effects in practice. We test whether top corporate executives are miscalibrated, and whether their miscalibration impacts investment behavior. Over six years, we collect a unique panel of nearly 7,000 observations of probability distributions provided by top financial executives regarding the stock market. Financial executives are miscalibrated: realized market returns are within the executives' 80% confidence intervals only 38% of the time. We show that companies with overconfident CFOs use lower discount rates to value cash flows, and that they invest more, use more debt, are less likely to pay dividends, are more likely to repurchase shares, and they use proportionally more long-term, as opposed to short-term, debt. The pervasive effect of this miscalibration suggests that the effect of overconfidence should be explicitly modeled when analyzing corporate decision-making.
Popularity A Bridge Between Classical And Behavioral Finance
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Author : Roger G. Ibbotson
language : en
Publisher: CFA Institute Research Foundation
Release Date : 2018
Popularity A Bridge Between Classical And Behavioral Finance written by Roger G. Ibbotson and has been published by CFA Institute Research Foundation this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with Business & Economics categories.
Classical and behavioral finance are often seen as being at odds, but the idea of “popularity” has been introduced as a way of reconciling the two approaches. Investors like or dislike various characteristics of securities for rational reasons (as in classical finance) or irrational reasons (as in behavioral finance), which makes the assets popular or unpopular. In the capital markets, popular (unpopular) securities trade at prices that are higher (lower) than they would be otherwise; hence, the shares may provide lower (higher) expected returns.This book builds on this idea and expands it in two major ways. First, it introduces a rigorous asset pricing model, the popularity asset pricing model (PAPM), which adds investor preferences for security characteristics other than the risk and expected return that are part of the capital asset pricing model. A major conclusion of the PAPM is that the expected return of any security is a linear function of not only its systematic risk (beta) but also of all security characteristics that investors care about. The other major contribution of the book is new empirical work that, while confirming the well-known premiums (such as size, value, and liquidity) in a popularity context, supports the popularity hypothesis on the basis of portfolios of stocks based on such characteristics as brand value, sustainable competitive advantage, and reputation. Popularity unifies the factors that affect price in classical finance with those that drive price in behavioral finance, thus creating a unifying theory or bridge between classical and behavioral finance.