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Overweighting Private Information: Three Measures, One Bias?

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  • Gerlinde Fellner

    ()
    (WU Vienna, Department of Economics, Institute of Economic Policy and Industrial Economics)

  • Sebastian Krügel

    ()
    (Max Planck Institute of Economics, IMPRS "Uncertainty", Jena)

Abstract

Overweighting private information is often used to explain various detrimental decisions. In behavioral economics and finance, it is usually modeled as a direct consequence of misperceiving signal reliability. This bias is typically dubbed overconfidence and linked to the judgment literature in psychology. Empirical tests of the models often fail to find evidence for the predicted effects of overconfidence. These studies assume, however, that a specific type of overconfidence, i.e., "miscalibration," captures the underlying trait. We challenge this assumption and borrow the psychological methodology of single-cue probability learning to obtain a direct measure for overweighting private information. We find that overweighting private information and measures of "miscalibration" are unrelated, indicating that different kinds of misperceptions are at work. Thus, in order to test the theoretical predictions of the overconfidence literature in economics and finance, one cannot rely on the well-established "miscalibration" bias. We find no gender differences in overconfidence for our measures except for one, where women are more overconfident than men.

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File URL: http://pubdb.wiwi.uni-jena.de/pdf/wp_2010_058.pdf
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Bibliographic Info

Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2010-058.

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Date of creation: 25 Aug 2010
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Handle: RePEc:jrp:jrpwrp:2010-058

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Keywords: overconfidence; miscalibration; signal perception; cognitive bias;

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  1. O'Connor, Marcus & Lawrence, Michael, 1992. "Time series characteristics and the widths of judgemental confidence intervals," International Journal of Forecasting, Elsevier, vol. 7(4), pages 413-420, March.
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