Overconfidence, Effort, and Investment
AbstractAbstract: 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 InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2013-035.
Date of creation: 2013
Date of revision:
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Web page: http://center.uvt.nl
Self-confidence; Overconfidence; Judgmental Bias; Better-than-Average; Overinvestment; Investment Choice; Effort;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-15 (All new papers)
- NEP-CBE-2013-07-15 (Cognitive & Behavioural Economics)
- NEP-PPM-2013-07-15 (Project, Program & Portfolio Management)
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