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Overconfidence, Effort, and Investment

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  • Pikulina, E.S.
  • Renneboog, L.D.R.
  • Horst, J.R. ter
  • Tobler, P.N.

    (Tilburg University, Center for Economic Research)

Abstract

Abstract: The theoretical finance literature predicts that overconfident managers overinvest in risky projects and exert more effort to learn about potentially value-enhancing projects in comparison with their unbiased peers. We test this prediction experimentally. We demonstrate that strong overconfidence results in overinvestment and excess effort levels, moderate overconfidence leads to accurate decisions, and underconfidence induces underinvestment and insufficient effort. Our results can be generalized as they are based on different subject types (financial professionals and students), various media (computer-, paper-, and web-based designs), and different types of effort costs (real effort and monetary investment costs).

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2013-035.

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Date of creation: 2013
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Handle: RePEc:dgr:kubcen:2013035

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Web page: http://center.uvt.nl

Related research

Keywords: Self-confidence; Overconfidence; Judgmental Bias; Better-than-Average; Overinvestment; Investment Choice; Effort;

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  1. Shavit, Tal & Sonsino, Doron & Benzion, Uri, 2001. "A comparative study of lotteries-evaluation in class and on the Web," Journal of Economic Psychology, Elsevier, vol. 22(4), pages 483-491, August.
  2. Potters, J.J.M. & Winden, F.A.A.M. van, 2000. "Professionals and students in a lobbying experiment - Professional rules of conduct and subject surrogacy," Open Access publications from Tilburg University urn:nbn:nl:ui:12-84634, Tilburg University.
  3. Oberlechner, Thomas & Osler, Carol, 2012. "Survival of Overconfidence in Currency Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(01), pages 91-113, February.
  4. Reuben, Ernesto & Rey-Biel, Pedro & Sapienza, Paola & Zingales, Luigi, 2010. "The Emergence of Male Leadership in Competitive Environments," IZA Discussion Papers 5300, Institute for the Study of Labor (IZA).
  5. Schrand, Catherine M. & Zechman, Sarah L.C., 2012. "Executive overconfidence and the slippery slope to financial misreporting," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 311-329.
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