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An Insight into Overconfidence in the Forecasting Abilities of Financial Advisors

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  • Gerhard van de Venter

    (School of Finance and Economics, Faculty of Business, University of Technology, Sydney, Broadway, NSW 2007.)

  • David Michayluk

    (School of Finance and Economics, Faculty of Business, University of Technology, Sydney, Broadway, NSW 2007.)

Abstract

Financial market participants exercise judgment in decision making and psychological studies have shown that individuals are overconfident about their ability to evaluate financial securities. Range estimation calibration studies indicate that individuals tend to estimate narrow intervals in their estimation of unknown future quantities, suggesting overconfidence. Financial planners have an inherent duty of care and this may lead these individuals to behave differently in their estimation methodology and behaviour. From a survey of Australian financial planners, we find extensive overconfidence in respondents' ability to make judgements under uncertainty as shown by a narrow range of forecasts and a substantial number of inaccurate predictions. The overconfidence is present both when comparing estimates to the ex-post outcome of a predicted quantity and to an interval based on historical return volatility.

Suggested Citation

  • Gerhard van de Venter & David Michayluk, 2008. "An Insight into Overconfidence in the Forecasting Abilities of Financial Advisors," Australian Journal of Management, Australian School of Business, vol. 32(3), pages 545-557, March.
  • Handle: RePEc:sae:ausman:v:32:y:2008:i:3:p:545-557
    DOI: 10.1177/031289620803200309
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    File URL: https://journals.sagepub.com/doi/10.1177/031289620803200309
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    References listed on IDEAS

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    Cited by:

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    5. Vetter, J. & Benlian, Alexander & Hess, T., 2011. "Overconfidence in IT Investment Decisions: Why Knowledge can be Boon and Bane at the same Time," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 58030, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    6. Oberlechner, Thomas & Osler, Carol, 2012. "Survival of Overconfidence in Currency Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(1), pages 91-113, February.
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