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Overconfident investors and probability misjudgments

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  • Kliger, Doron
  • Levy, Ori

Abstract

This paper explores systematic distortions of subjective probabilities by overconfident investors. In agreement with many non-expected utility theories, our devised setup acknowledges nonlinear weighting of physical probabilities by both rational and overconfident investors. Overconfidence - assumed to be higher after a history of gains and lower after a history of losses - changes these probability transformations. Using US asset price data, overconfident investors are found to be more optimistic than rational investors about future prospects.

Suggested Citation

  • Kliger, Doron & Levy, Ori, 2010. "Overconfident investors and probability misjudgments," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 39(1), pages 24-29, January.
  • Handle: RePEc:eee:soceco:v:39:y:2010:i:1:p:24-29
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    References listed on IDEAS

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    Cited by:

    1. Michailova, Julija, 2010. "Development of the overconfidence measurement instrument for the economic experiment," MPRA Paper 26384, University Library of Munich, Germany.
    2. Sinkey, Michael, 2015. "How do experts update beliefs? Lessons from a non-market environment," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 57(C), pages 55-63.

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