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Confidence And Overconfidence In Banking

Author

Listed:
  • Damiano Bruno Silipo
  • Giovanni Verga
  • Sviatlana Hlebik

    (Dipartimento di Economia, Statistica e Finanza "Giovanni Anania" - DESF, Università della Calabria)

Abstract

The paper investigates the causes of confidence and overconfidence and their effects on banking behavior and performance for a large sample of American banks in the period 2000-2013. We construct a new indicator of confidence based on banks’ loss provisions and show that before 2007 risk-taking, lending and leverage increased relatively more for banks with an intermediate degree of confidence (mid-confidents) than for the overconfident. The former also suffered the greatest losses in the financial crash of 2007-2008. Hence, unlike the previous literature on overconfidence, we find that the financial crisis was determined mainly by the increased confidence of the mid-confident bank CEOs and not the behavioral biases of overconfident CEOs. The latter, in fact, have more persistent beliefs and react less strongly to news during cyclical upswings. Finally, we show that overconfident behavior is unlikely to maximize a bank’s value.

Suggested Citation

  • Damiano Bruno Silipo & Giovanni Verga & Sviatlana Hlebik, 2017. "Confidence And Overconfidence In Banking," Working Papers 201703, Università della Calabria, Dipartimento di Economia, Statistica e Finanza "Giovanni Anania" - DESF.
  • Handle: RePEc:clb:wpaper:201703
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    References listed on IDEAS

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    More about this item

    Keywords

    Confidence and Overconfidence Index; Banking behavior; Confidence and Bank Value;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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