IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Confidence interval estimation tasks and the economics of overconfidence

  • Cesarini, David
  • Sandewall, Orjan
  • Johannesson, Magnus

Experiments in psychology, where subjects estimate confidence intervals to a series of factual questions, have shown that individuals report far too narrow intervals. This has been interpreted as evidence of overconfidence in the preciseness of knowledge, a potentially serious violation of the rationality assumption in economics. Following these results a growing literature in economics has incorporated overconfidence in models of, for instance, financial markets. In this paper we investigate the robustness of results from confidence interval estimation tasks with respect to a number of manipulations: frequency assessments, peer frequency assessments, iteration, and monetary incentives. Our results suggest that a large share of the overconfidence in interval estimation tasks is an artifact of the response format. Using frequencies and monetary incentives reduces the measured overconfidence in the confidence interval method by about 65%. The results are consistent with the notion that subjects have a deep aversion to setting broad confidence intervals, a reluctance that we attribute to a socially rational trade-off between informativeness and accuracy.

(This abstract was borrowed from another version of this item.)

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: http://www.sciencedirect.com/science/article/B6V8F-4H68SXC-1/2/75792d5618d4ae0ca5d1133d1b9eede6
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 61 (2006)
Issue (Month): 3 (November)
Pages: 453-470

as
in new window

Handle: RePEc:eee:jeborg:v:61:y:2006:i:3:p:453-470
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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. Smith, Vernon L & Walker, James M, 1993. "Monetary Rewards and Decision Cost in Experimental Economics," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 245-61, April.
  2. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1988. "The Survival of Noise Traders in Financial Markets," NBER Working Papers 2715, National Bureau of Economic Research, Inc.
  3. Orphanides, Athanasios, 2000. "The quest for prosperity without inflation," Working Paper Series 0015, European Central Bank.
  4. Werner F. M. De Bondt & Richard H. Thaler, 1994. "Financial Decision-Making in Markets and Firms: A Behavioral Perspective," NBER Working Papers 4777, National Bureau of Economic Research, Inc.
  5. Kyle, Albert S & Wang, F Albert, 1997. " Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?," Journal of Finance, American Finance Association, vol. 52(5), pages 2073-90, December.
  6. Yates, J. Frank & Lee, Ju-Whei & Shinotsuka, Hiromi, 1996. "Beliefs about Overconfidence, Including Its Cross-National Variation," Organizational Behavior and Human Decision Processes, Elsevier, vol. 65(2), pages 138-147, February.
  7. 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.
  8. Yates, J. Frank & Zhu, Ying & Ronis, David L. & Wang, Deng-Feng & Shinotsuka, Hiromi & Toda, Masanao, 1989. "Probability judgment accuracy: China, Japan, and the United States," Organizational Behavior and Human Decision Processes, Elsevier, vol. 43(2), pages 145-171, April.
  9. Dowie, Jack A, 1976. "On the Efficiency and Equity of Betting Markets," Economica, London School of Economics and Political Science, vol. 43(17), pages 139-50, May.
  10. Tobias J. Moskowitz & Annette Vissing-Jorgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," NBER Working Papers 8876, National Bureau of Economic Research, Inc.
  11. Camerer, Colin F. & Hogarth, Robin M., 1999. "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework," Working Papers 1059, California Institute of Technology, Division of the Humanities and Social Sciences.
  12. Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," American Economic Review, American Economic Association, vol. 92(4), pages 745-778, September.
  13. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
  14. 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.
  15. Terrance Odean, 1998. "Volume, Volatility, Price and Profit When All Traders Are Above Average," Finance 9803001, EconWPA.
  16. 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.
  17. Brad M. Barber & Terrance Odean, 2001. "Boys Will Be Boys: Gender, Overconfidence, And Common Stock Investment," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 261-292, February.
  18. Smith, Vernon L, 1991. "Rational Choice: The Contrast between Economics and Psychology," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 877-97, August.
Full references (including those not matched with items on IDEAS)

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

When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:61:y:2006:i:3:p:453-470. 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: (Zhang, Lei)

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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.