IDEAS home Printed from https://ideas.repec.org/a/sae/ausman/v32y2008i3p545-557.html
   My bibliography  Save this article

An Insight into Overconfidence in the Forecasting Abilities of Financial Advisors

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/031289620803200309
    Download Restriction: no

    References listed on IDEAS

    as
    1. Kenneth A. Froot & Jeffrey A. Frankel, 1989. "Forward Discount Bias: Is it an Exchange Risk Premium?," The Quarterly Journal of Economics, Oxford University Press, vol. 104(1), pages 139-161.
    2. Dennis Dittrich & Werner Güth & Boris Maciejovsky, 2001. "Overconfidence in Investment Decisions: An Experimental Approach," CESifo Working Paper Series 626, CESifo.
    3. Snelbecker, Glenn E. & Roszkowski, Michael J. & Cutler, Neal E., 1990. "Investors' risk tolerance and return aspirations, and financial advisors' interpretations: A conceptual model and exploratory data," Journal of Behavioral Economics, Elsevier, vol. 19(4), pages 377-393.
    4. Roszkowski, Michael J. & Snelbecker, Glenn E., 1990. "Effects of "Framing" on measures of risk tolerance: Financial planners are not immune," Journal of Behavioral Economics, Elsevier, vol. 19(3), pages 237-246.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. Gignac, Gilles E. & Zajenkowski, Marcin, 2019. "People tend to overestimate their romantic partner's intelligence even more than their own," Intelligence, Elsevier, vol. 73(C), pages 41-51.
    3. Zamri Ahmad & Haslindar Ibrahim & Jasman Tuyon, 2017. "Behavior of fund managers in Malaysian investment management industry," Qualitative Research in Financial Markets, Emerald Group Publishing, vol. 9(3), pages 205-239, August.
    4. Marina Fiedler, 2011. "Symposium: Experience and Confidence in an Internet-Based Asset Market Experiment," Southern Economic Journal, Southern Economic Association, vol. 78(1), pages 30-52, July.
    5. Thomas Oberlechner & Carol Osler, 2009. "Overconfidence in Currency Markets," Working Papers 02, Brandeis University, Department of Economics and International Businesss School.
    6. Gignac, Gilles E. & Zajenkowski, Marcin, 2020. "The Dunning-Kruger effect is (mostly) a statistical artefact: Valid approaches to testing the hypothesis with individual differences data," Intelligence, Elsevier, vol. 80(C).
    7. Amandha Ganegoda & John Evans, 2014. "A framework to manage the measurable, immeasurable and the unidentifiable financial risk," Australian Journal of Management, Australian School of Business, vol. 39(1), pages 5-34, February.
    8. Kris Hardies & Diane Breesch & Joël Branson, 2011. "Male and female auditors' overconfidence," Managerial Auditing Journal, Emerald Group Publishing, vol. 27(1), pages 105-118, November.
    9. Zamri Ahmad & Haslindar Ibrahim & Jasman Tuyon, 2017. "Institutional investor behavioral biases: syntheses of theory and evidence," Management Research Review, Emerald Group Publishing, vol. 40(5), pages 578-603, May.
    10. 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).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Adnan Haider Bukhari & Safdar Ullah Khan, 2008. "A Small Open Economy DSGE Model for Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 47(4), pages 963-1008.
    2. Kollmann, Robert, 2003. "Monetary Policy Rules in an Interdependent World," CEPR Discussion Papers 4012, C.E.P.R. Discussion Papers.
    3. Anella Munro, 2014. "Exchange rates, expected returns and risk," Reserve Bank of New Zealand Discussion Paper Series DP2014/01, Reserve Bank of New Zealand.
    4. Sager, Michael & Taylor, Mark P., 2014. "Generating currency trading rules from the term structure of forward foreign exchange premia," Journal of International Money and Finance, Elsevier, vol. 44(C), pages 230-250.
    5. Alina Serban, 2009. "Combining Mean Reversion and Momentum Trading Strategies in Foreign Exchange Markets," Working Papers 09-14, Department of Economics, West Virginia University.
    6. Jascha-Alexander Koch & Michael Siering, 2019. "The recipe of successful crowdfunding campaigns," Electronic Markets, Springer;IIM University of St. Gallen, vol. 29(4), pages 661-679, December.
    7. Boum-Jong Choe, 1990. "Rational expectations and commodity price forecasts," Policy Research Working Paper Series 435, The World Bank.
    8. Philippe Bacchetta & Eric van Wincoop, 2010. "Infrequent Portfolio Decisions: A Solution to the Forward Discount Puzzle," American Economic Review, American Economic Association, vol. 100(3), pages 870-904, June.
    9. Alfred V Guender, 2015. "International Evidence on the Role of Monetary Policy in the Uncovered Interest Rate Parity Puzzle," Working Papers in Economics 15/15, University of Canterbury, Department of Economics and Finance.
    10. Zhiguang Wang & Prasad Bidarkota, 2012. "Risk premia in forward foreign exchange rates: a comparison of signal extraction and regression methods," Empirical Economics, Springer, vol. 42(1), pages 21-51, February.
    11. Kerstin Bernoth & Jürgen von Hagen & Casper G. de Vries, 2007. "The Forward Premium Puzzle only emerges gradually," Tinbergen Institute Discussion Papers 07-033/2, Tinbergen Institute.
    12. Dhekra Azouzi & Rohit Vishal Kumar & Chaker Aloui, 2011. "Forward Rate Unbiasedness Hypothesis in the Tunisian Exchange Rate Market," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 1(2), pages 17-44, July.
    13. Richard H. Clarida & Mark P. Taylor, 1997. "The Term Structure Of Forward Exchange Premiums And The Forecastability Of Spot Exchange Rates: Correcting The Errors," The Review of Economics and Statistics, MIT Press, vol. 79(3), pages 353-361, August.
    14. Stuart Landon & Constance E. Smith, 2003. "The Risk Premium, Exchange Rate Expectations, and the Forward Exchange Rate: Estimates for the Yen–Dollar Rate," Review of International Economics, Wiley Blackwell, vol. 11(1), pages 144-158, February.
    15. Meredith Beechey & David Gruen & James Vickery, 2000. "The Efficient Market Hypothesis: A Survey," RBA Research Discussion Papers rdp2000-01, Reserve Bank of Australia.
    16. Maurice Obstfeld, 1990. "The Effectiveness of Foreign-Exchange Intervention: Recent Experience, 1985- 1988," NBER Chapters, in: International Policy Coordination and Exchange Rate Fluctuations, pages 197-246, National Bureau of Economic Research, Inc.
    17. Philippe Bacchetta & Eric van Wincoop, 2005. "Rational Inattention: A Solution to the Forward Discount Puzzle," NBER Working Papers 11633, National Bureau of Economic Research, Inc.
    18. Jeffrey A. Frankel & Kenneth Froot, 1990. "Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market," NBER Working Papers 3470, National Bureau of Economic Research, Inc.
    19. Jianfeng Yu, 2011. "A sentiment-based explanation of the forward premium puzzle," Globalization Institute Working Papers 90, Federal Reserve Bank of Dallas.
    20. Chinn, Menzie D., 2006. "The (partial) rehabilitation of interest rate parity in the floating rate era: Longer horizons, alternative expectations, and emerging markets," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 7-21, February.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:ausman:v:32:y:2008:i:3:p:545-557. 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: (SAGE Publications). General contact details of provider: http://www.agsm.edu.au .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.