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Overconfidence in investment decisions: An experimental approach

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Author Info
Dennis Dittrich
Werner Güth
Boris Maciejovsky

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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.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal The European Journal of Finance.

Volume (Year): 11 (2005)
Issue (Month): 6 (December)
Pages: 471-491
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Handle: RePEc:taf:eurjfi:v:11:y:2005:i:6:p:471-491

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Related research
Keywords: Risky decision making behavioural finance portfolio choice experimental economics

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gary Charness & Uri Gneezy, 2003. "Portfolio Choice and Risk Attitudes: An Experiment," University of California at Santa Barbara, Economics Working Paper Series 12-03, Department of Economics, UC Santa Barbara. [Downloadable!]
  2. Klaus Abbink & Bettina Rockenbach, 2005. "Option Pricing by Students and Professional Traders: A Behavioural Investigation," Discussion Papers 2005-12, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham. [Downloadable!]
  3. Gerlinde Fellner & Werner Güth & Boris Maciejovsky, 2001. "Illusion of Expertise in Portfolio Decisions - An Experimental Approach -," Discussion Papers on Strategic Interaction 2001-02, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
    Other versions:
  4. Boris Maciejovsky & Tarek El-Sehitya & Hans Haumerb & Christian Helmensteinc & Erich Kirchlerd, . "Hindsight Bias and Individual Risk Attitude within the Context of Experimental Asset Markets," Discussion Papers on Strategic Interaction 2002-16, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
  5. Gerlinde Fellner & Werner Güth & Boris Maciejovsky, 2005. "Satisficing in Financial Decision Making A Theoretical and Experimental Attempt to Explore Bounded Rationality," Discussion Papers on Strategic Interaction 2005-23, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
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