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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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    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.
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    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).

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