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Overconfidence in Psychology and Finance – an Interdisciplinary Literature Review

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  • Skala, Dorota

Abstract

This paper reviews the literature on one of the most meaningful concepts in modern behavioural finance, the overconfidence phenomenon. Overconfidence is presented as a well-developed psychological theory, with main facets comprising miscalibration, betterthan- average effect, illusion of control and unrealistic optimism. The primary applications of overconfidence in contemporary finance are analysed, from the perspective of financial markets and corporate behaviour. Experimental studies, formal models and analyses of market data demonstrate that overconfidence at least partially solves some financial market puzzles that cannot be accounted for by standard economic theory. Overconfidence in the corporate context may affect not only a company’s internal financing structure, but also its interactions with other market participants through merger and acquisition activity.

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File URL: http://mpra.ub.uni-muenchen.de/26386/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26386.

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Date of creation: Apr 2008
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Handle: RePEc:pra:mprapa:26386

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Related research

Keywords: overconfidence; behavioral finance; investor psychology; financial markets; corporate policies; overconfident investors;

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References

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  14. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
  15. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
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  17. Brenner, Lyle A. & Koehler, Derek J. & Liberman, Varda & Tversky, Amos, 1996. "Overconfidence in Probability and Frequency Judgments: A Critical Examination," Organizational Behavior and Human Decision Processes, Elsevier, vol. 65(3), pages 212-219, March.
  18. Ulrike Malmendier & Geoffrey Tate, 2005. "CEO Overconfidence and Corporate Investment," Journal of Finance, American Finance Association, vol. 60(6), pages 2661-2700, December.
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Citations

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Cited by:
  1. Stefanescu, Razvan & Dumitriu, Ramona & Nistor, Costel, 2012. "Overreaction and underreaction on the BUCHAREST STOCK EXCHANGE," MPRA Paper 41555, University Library of Munich, Germany, revised 25 Sep 2012.
  2. Heller, Yuval, 2010. "Overconfidence and risk dispersion," MPRA Paper 25893, University Library of Munich, Germany.
  3. Dumitriu, Ramona & Stefanescu, Razvan & Nistor, Costel, 2012. "Reactions of the capital markets to the shocks before and during the global crisis," MPRA Paper 41540, University Library of Munich, Germany, revised 10 Jan 2012.

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