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Measuring overconfidence: Methodological problems and statistical artifacts

Listed author(s):
  • Olsson, Henrik
Registered author(s):

    Psychological studies are frequently cited in the business and finance literature to bolster claims that various kinds of economic disasters, from the large proportion of start-ups that quickly go out of business to the exaggerated confidence of financial investors, can be attributed to overconfidence. This article reviews some of the problems associated with concluding that people overestimate the accuracy of their judgments based on observed overconfidence measured as the difference between mean subjective probability and proportion correct. Methodological and statistical artifacts, such as regression, can explain many of the observed instances of apparent overconfidence.

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    File URL: http://www.sciencedirect.com/science/article/pii/S014829631400099X
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    Article provided by Elsevier in its journal Journal of Business Research.

    Volume (Year): 67 (2014)
    Issue (Month): 8 ()
    Pages: 1766-1770

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    Handle: RePEc:eee:jbrese:v:67:y:2014:i:8:p:1766-1770
    DOI: 10.1016/j.jbusres.2014.03.002
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbusres

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    1. Markus Glaser & Martin Weber, 2007. "Overconfidence and trading volume," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 32(1), pages 1-36, June.
    2. Soll, Jack B., 1996. "Determinants of Overconfidence and Miscalibration: The Roles of Random Error and Ecological Structure," Organizational Behavior and Human Decision Processes, Elsevier, vol. 65(2), pages 117-137, February.
    3. Juslin, Peter & Winman, Anders & Olsson, Henrik, 2003. "Calibration, additivity, and source independence of probability judgments in general knowledge and sensory discrimination tasks," Organizational Behavior and Human Decision Processes, Elsevier, vol. 92(1-2), pages 34-51.
    4. Klayman, Joshua & Soll, Jack B. & Gonzalez-Vallejo, Claudia & Barlas, Sema, 1999. "Overconfidence: It Depends on How, What, and Whom You Ask, , , , , , , , ," Organizational Behavior and Human Decision Processes, Elsevier, vol. 79(3), pages 216-247, September.
    5. Biais, Bruno & Hilton, Denis & Mazurier, Karine & Pouget, Sébastien, 2004. "Judgmental Overconfidence, Self-Monitoring and Trading Performance in an Experimental Financial Market," IDEI Working Papers 259, Institut d'Économie Industrielle (IDEI), Toulouse.
    6. Brad M. Barber & Terrance Odean, 2001. "Boys will be Boys: Gender, Overconfidence, and Common Stock Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 261-292.
    7. Juslin, Peter, 1994. "The Overconfidence Phenomenon as a Consequence of Informal Experimenter-Guided Selection of Almanac Items," Organizational Behavior and Human Decision Processes, Elsevier, vol. 57(2), pages 226-246, February.
    8. Larrick, Richard P. & Burson, Katherine A. & Soll, Jack B., 2007. "Social comparison and confidence: When thinking you're better than average predicts overconfidence (and when it does not)," Organizational Behavior and Human Decision Processes, Elsevier, vol. 102(1), pages 76-94, January.
    9. 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.
    10. Juslin, Peter & Olsson, Henrik & Winman, Anders, 1998. "The Calibration Issue: Theoretical Comments on Suantak, Bolger, and Ferrell (1996)," Organizational Behavior and Human Decision Processes, Elsevier, vol. 73(1), pages 3-26, January.
    11. Pfeifer, Phillip E., 1994. "Are We Overconfident in the Belief That Probability Forecasters Are Overconfident?," Organizational Behavior and Human Decision Processes, Elsevier, vol. 58(2), pages 203-213, May.
    12. Dawes, Robyn M. & Mulford, Matthew, 1996. "The False Consensus Effect and Overconfidence: Flaws in Judgment or Flaws in How We Study Judgment?," Organizational Behavior and Human Decision Processes, Elsevier, vol. 65(3), pages 201-211, March.
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