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Overconfidence and investment: An experimental approach

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  • Pikulina, Elena
  • Renneboog, Luc
  • Tobler, Philippe N.

Abstract

A positive relation between overconfidence and investment provision has been theoretically justified and practically assumed in the literature, but has not been thoroughly investigated. We test and confirm this positive relation between direct measures of overconfidence in one's financial knowledge and choice of investment. More precisely, strong overconfidence results in excess investment, underconfidence induces underinvestment, whereas moderate overconfidence leads to accurate investments. Our experimental results are based on different subject pools, financial professionals and students, and different media: computer-, paper-, and web-based. The degree of one's overestimation of one's individual financial knowledge relative to one's actual knowledge as well as relative to the knowledge of peers explains investment decisions better than one's actual knowledge. The relation between overconfidence and investment is robust to the degree of individual risk aversion, the riskiness of the investment projects, and to the changes in incentives structure.

Suggested Citation

  • Pikulina, Elena & Renneboog, Luc & Tobler, Philippe N., 2017. "Overconfidence and investment: An experimental approach," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 175-192.
  • Handle: RePEc:eee:corfin:v:43:y:2017:i:c:p:175-192
    DOI: 10.1016/j.jcorpfin.2017.01.002
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    Cited by:

    1. repec:eee:riibaf:v:42:y:2017:i:c:p:338-352 is not listed on IDEAS
    2. Barron, Kai & Gravert, Christina, 2018. "Beliefs and actions: How a shift in confidence affects choices," MPRA Paper 84743, University Library of Munich, Germany.

    More about this item

    Keywords

    Overconfidence; Better-than-average; Bias; Investment; Risk aversion; Professionals;

    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

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