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Does expertise influence the impact of overconfidence on judgment, valuation and investment decision?

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  • Lambert, Jérôme
  • Bessière, Véronique
  • N’Goala, Gilles

Abstract

Empirical research documents that overconfidence has a strong impact on investment decision. In this experimental study using a within-subject design and an asset allocation problem, we detail this relationship by introducing a stage of judgment (initial knowledge about the assets to invest in) and valuation (forecasts to be made) before the investment decision. We also examine the role of expertise by comparing a group of bankers (20 loan officers) and a group of students (64), control in the role of risk aversion, and implement different measures of overconfidence (miscalibration in two formats – the BTA effect and the illusion of control). Our results show that no differences were observed between bankers and students in the degree of overconfidence. However, overconfidence seems to determine decision-making in a different way across the two groups. Concerning students, we observed that overconfidence influenced general tasks such as global knowledge of the assets but when it came to investing, risk aversion had a major effect. In contrast, bankers were strongly influenced by their overconfidence. For them, it mainly affected specific tasks (valuation and investment choices) but, surprisingly, risk aversion had no effect on investment decision. Our results suggest that introducing an assessment stage in the decision process is an aid to understanding the differences between experts and novices.

Suggested Citation

  • Lambert, Jérôme & Bessière, Véronique & N’Goala, Gilles, 2012. "Does expertise influence the impact of overconfidence on judgment, valuation and investment decision?," Journal of Economic Psychology, Elsevier, vol. 33(6), pages 1115-1128.
    • Handle: RePEc:eee:joepsy:v:33:y:2012:i:6:p:1115-1128
    DOI: 10.1016/j.joep.2012.07.007
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    6. Posavac, Steven S. & Ratchford, Mark & Bollen, Nicolas P.B. & Sanbonmatsu, David M., 2019. "Premature infatuation and commitment in individual investing decisions," Journal of Economic Psychology, Elsevier, vol. 72(C), pages 245-259.
    7. Mai, Nhat Chi, 2020. "Behaviours In The Stock Market - An Empirical Study," OSF Preprints ypq8m, Center for Open Science.
    8. Michał Krawczyk & Maciej Wilamowski, 2015. "Are we all overconfident in the long run? Evidence from one million marathon participants," Working Papers 2015-01, Faculty of Economic Sciences, University of Warsaw.
    9. Kovacs, Roxanne J. & Lagarde, Mylene & Cairns, John, 2020. "Overconfident health workers provide lower quality healthcare," Journal of Economic Psychology, Elsevier, vol. 76(C).
    10. Fatima Akhtar & K. S. Thyagaraj & Niladri Das, 2018. "Perceived Investment Performance of Individual Investors is Related to the Big-Five and the General Factor of Personality (GPF)," Global Business Review, International Management Institute, vol. 19(2), pages 342-356, April.
    11. Gillian Anderson & Lesley Walls & Matthew Revie & Euan Fenelon & Calum Storie, 2015. "Quantifying intra-organisational risks: An analysis of practice-theory tensions in probability elicitation to improve technical risk management in an energy utility," Journal of Risk and Reliability, , vol. 229(3), pages 171-180, June.
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    More about this item

    Keywords

    D03; D81; G00; 2260; 2340; Overconfidence; Expertise; Investment decision; Loan officer; Banker; Risk aversion; Risk perception; Forecasting;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G00 - Financial Economics - - General - - - General

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