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Informational overconfidence in return prediction – More properties

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  • Sonsino, Doron
  • Regev, Eran

Abstract

A field experiment revealed 3 forms of unrealistic optimism in skilled investors’ interval predictions of future stock returns. The judgmental intervals were about 50% shorter than realized spreads in recent 3–6months histories, suggesting that “underestimation of volatility” persists past the financial crisis. The intervals, however, rapidly widened as predictions diverged from zero, and a complementary technical-forecasting experiment showed that the increased spread pattern emerges even when volatility is accounted. The results support “anchoring with noisy monotone adjustments” and suggest that overconfidence hazards may instinctively attenuate when expectations get extreme.

Suggested Citation

  • Sonsino, Doron & Regev, Eran, 2013. "Informational overconfidence in return prediction – More properties," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 72-84.
  • Handle: RePEc:eee:joepsy:v:39:y:2013:i:c:p:72-84
    DOI: 10.1016/j.joep.2013.06.006
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Shin, Su Hyun & Kim, Kyoung Tae & Seay, Martin, 2020. "Sources of information and portfolio allocation," Journal of Economic Psychology, Elsevier, vol. 76(C).
    2. Helen X. H. Bao & Steven Haotong Li, 2016. "Overconfidence And Real Estate Research: A Survey Of The Literature," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(04), pages 1-24, September.
    3. Neubert, Milena & Bannier, Christina E., 2016. "Actual and perceived financial sophistication and wealth accumulation: The role of education and gender," Annual Conference 2016 (Augsburg): Demographic Change 145593, Verein für Socialpolitik / German Economic Association.
    4. Markus Spiwoks & Kilian Bizer, 2018. "Correlation Neglect and Overconfidence. An Experimental Study," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 8(3), pages 1-5.
    5. Kovacs, Roxanne J. & Lagarde, Mylene & Cairns, John, 2020. "Overconfident health workers provide lower quality healthcare," Journal of Economic Psychology, Elsevier, vol. 76(C).
    6. Weinstock, Eyal & Sonsino, Doron, 2014. "Are risk-seekers more optimistic? Non-parametric approach," Journal of Economic Behavior & Organization, Elsevier, vol. 108(C), pages 236-251.

    More about this item

    Keywords

    D84; C53; C93; 2240; 2340; Informational overconfidence; Optimism; Perceived volatility; Anchoring and adjustment;

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments

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