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An Insight into Overconfidence in the Forecasting Abilities of Financial Advisors

Listed author(s):
  • 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.)

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.

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File URL: http://aum.sagepub.com/content/32/3/545.abstract
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Article provided by Australian School of Business in its journal Australian Journal of Management.

Volume (Year): 32 (2008)
Issue (Month): 3 (March)
Pages: 545-557

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Handle: RePEc:sae:ausman:v:32:y:2008:i:3:p:545-557
Contact details of provider: Web page: http://www.agsm.edu.au

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