Advanced Search
MyIDEAS: Login to save this paper or follow this series

Illusion of Expertise in Portfolio Decisions - An Experimental Approach -

Contents:

Author Info

  • Gerlinde Fellner

    ()

  • Werner Güth

    ()

  • Boris Maciejovsky

    ()

Abstract

Overall, 72 subjects invest their endowment in four risky assets. Each combination of assets yields the same expected return and variance of returns. Illusion of expertise prevails when one prefers nevertheless the self-selected portfolio. After being randomly assigned to groups of four subjects are ask to elect their "expert" based on responses to a prior decision task. Using the random price machanism reveals that 64% of the subjects prefer their own portfolio over the average group portfolio or the expert's portfolio. Illusion of expertise is shown to be stable individually, over alternatives, and for both eliciting methods, willingness to pay and to accept.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: ftp://papers.econ.mpg.de/esi/discussionpapers/2001-02.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Max Planck Institute of Economics, Strategic Interaction Group in its series Papers on Strategic Interaction with number 2001-02.

as in new window
Length: 26 pages
Date of creation: Nov 2001
Date of revision:
Handle: RePEc:esi:discus:2001-02

Note: Financial support by the Deutsche Forschungsgemeinschaft (SFB-373, C5) is gratefully acknowledged. We are indebted to Silke Meiner, Sylvia Schikora, and Volker Zieman for their research assistance. Valuable comments by Richard Thaler, Martin Weber and by participants at the GEW-meeting in Magdeburg are also acknowledged.
Contact details of provider:
Postal: Kahlaische Strasse 10, D-07745 Jena
Phone: +49-3641-68 65
Fax: +49-3641-68 69 90
Web page: http://www.econ.mpg.de/
More information through EDIRC

Order Information:
Email:
Web: http://www.econ.mpg.de/english/research/ESI/discuss.php

Related research

Keywords: Investment decisions; Portfolio selection; Overconfidence; Unrealistic optimism; Illusion of control; Endowment effect;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Michael C. Jensen, 1968. "The Performance Of Mutual Funds In The Period 1945–1964," Journal of Finance, American Finance Association, vol. 23(2), pages 389-416, 05.
  2. Charness, Gary & Gneezy, Uri, 2003. "Portfolio Choice and Risk Attitudes: An Experiment," University of California at Santa Barbara, Economics Working Paper Series qt7vz7w609, Department of Economics, UC Santa Barbara.
  3. Dennis Dittrich & Werner Güth & Boris Maciejovsky, 2001. "Overconfidence in Investment Decisions: An Experimental Approach," CESifo Working Paper Series 626, CESifo Group Munich.
  4. Kirchler, Erich & Maciejovsky, Boris & Weber, Martin, 0000. "Framing Effects on Asset Markets - An Experimental Analysis -," Sonderforschungsbereich 504 Publications 01-09, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  5. Berg, Joyce E, et al, 1986. "Controlling Preferences for Lotteries on Units of Experimental Exchange," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 281-306, May.
  6. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
  7. Andrew Metrick, 1999. "Performance Evaluation with Transactions Data: The Stock Selection of Investment Newsletters," Journal of Finance, American Finance Association, vol. 54(5), pages 1743-1775, October.
  8. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December.
  9. Benos, Alexandros V., 1998. "Aggressiveness and survival of overconfident traders," Journal of Financial Markets, Elsevier, vol. 1(3-4), pages 353-383, September.
  10. Womack, Kent L, 1996. " Do Brokerage Analysts' Recommendations Have Investment Value?," Journal of Finance, American Finance Association, vol. 51(1), pages 137-67, March.
  11. Peter Ockenfels & Rosemarie Nagel & Frank Heinemann, 2002. "Speculative Attacks and Financial Architecture: Experimental Analysis of Coordination Games with Public and Private Information," FMG Discussion Papers dp416, Financial Markets Group.
  12. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
  13. Selten, Reinhard & Abdolkarim Sadrieh & Klaus Abbink, 1995. "Money does Not Induce Risk Neutral Behavior, but Binary Lotteries Do even Worse," Discussion Paper Serie B 343, University of Bonn, Germany.
  14. Gervais, Simon & Odean, Terrance, 2001. "Learning to be Overconfident," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 1-27.
  15. Maciejovsky, B. & Kirchler, E., 2001. "Simultaneous Over-and Underconfidence: Evidence from Experimental Aseet Markets," Papers 185, Flinders of South Australia - Discipline of Economics.
  16. Knetsch, Jack L & Sinden, J A, 1984. "Willingness to Pay and Compensation Demanded: Experimental Evidence of an Unexpected Disparity in Measures of Value," The Quarterly Journal of Economics, MIT Press, vol. 99(3), pages 507-21, August.
  17. Brad M. Barber & Terrance Odean, 2001. "The Internet and the Investor," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 41-54, Winter.
  18. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
  19. Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
  20. Hirshleifer, David, 2001. "Investor Psychology and Asset Pricing," MPRA Paper 5300, University Library of Munich, Germany.
  21. Terrance Odean, 1998. "Volume, Volatility, Price and Profit When All Traders Are Above Average," Finance 9803001, EconWPA.
  22. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
  23. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128 Elsevier.
  24. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
  25. Harrison, Glenn W, 1992. "Theory and Misbehavior of First-Price Auctions: Reply," American Economic Review, American Economic Association, vol. 82(5), pages 1426-43, December.
  26. Levy, H & Markowtiz, H M, 1979. "Approximating Expected Utility by a Function of Mean and Variance," American Economic Review, American Economic Association, vol. 69(3), pages 308-17, June.
  27. David V. Budescu & Boris Maciejovsky, . "Reasoning and Institutions: Do Markets Facilitate Logical Reasoning in the Wason Selection Task?," Papers on Strategic Interaction 2003-04, Max Planck Institute of Economics, Strategic Interaction Group.
  28. Heath, Chip & Tversky, Amos, 1991. " Preference and Belief: Ambiguity and Competence in Choice under Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 4(1), pages 5-28, January.
  29. Shlomo Benartzi & Richard H. Thaler, 2002. "How Much Is Investor Autonomy Worth?," Journal of Finance, American Finance Association, vol. 57(4), pages 1593-1616, 08.
  30. Terrance Odean, 1998. "Volume, Volatility, Price, and Profit When All Traders Are Above Average," Journal of Finance, American Finance Association, vol. 53(6), pages 1887-1934, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Dennis Dittrich & Werner Güth & Boris Maciejovsky, . "Overconfidence in Investment Decisions: An Experimental Approach," Papers on Strategic Interaction 2001-03, Max Planck Institute of Economics, Strategic Interaction Group.
  2. Marion Eberlein & Judith Przemeck, 2008. "Whom will you choose? - Collaborator Selection and Selector’s Self-Prediction," Bonn Econ Discussion Papers bgse12_2008, University of Bonn, Germany.
  3. Frank Caliendo & Kevin X.D. Huang, 2007. "Overconfidence and Consumption over the Life Cycle," Vanderbilt University Department of Economics Working Papers 0712, Vanderbilt University Department of Economics.
  4. Adam S. Goodie & Diana L. Young, 2007. "The skill element in decision making under uncertainty: Control or competence?," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 2, pages 189-203, June.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:esi:discus:2001-02. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Karin Richter).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.