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Illusion of Expertise in Portfolio Decisions - An Experimental Approach -

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  • Gerlinde Fellner

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  • Werner Güth

    ()

  • Boris Maciejovsky

    ()

Abstract

Overall, 72 subjects invest their endowment in four risky assets. Each combination of assets yields the same expected return and variance of returns. Illusion of expertise prevails when one prefers nevertheless the self-selected portfolio. After being randomly assigned to groups of four subjects are ask to elect their "expert" based on responses to a prior decision task. Using the random price machanism reveals that 64% of the subjects prefer their own portfolio over the average group portfolio or the expert's portfolio. Illusion of expertise is shown to be stable individually, over alternatives, and for both eliciting methods, willingness to pay and to accept.

Suggested Citation

  • Gerlinde Fellner & Werner Güth & Boris Maciejovsky, 2001. "Illusion of Expertise in Portfolio Decisions - An Experimental Approach -," Papers on Strategic Interaction 2001-02, Max Planck Institute of Economics, Strategic Interaction Group.
  • Handle: RePEc:esi:discus:2001-02 Note: Financial support by the Deutsche Forschungsgemeinschaft (SFB-373, C5) is gratefully acknowledged. We are indebted to Silke Meiner, Sylvia Schikora, and Volker Zieman for their research assistance. Valuable comments by Richard Thaler, Martin Weber and by participants at the GEW-meeting in Magdeburg are also acknowledged.
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    References listed on IDEAS

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    Cited by:

    1. Caliendo, Frank & Huang, Kevin X.D., 2008. "Overconfidence and consumption over the life cycle," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1347-1369, December.
    2. Dennis Dittrich & Werner Guth & Boris Maciejovsky, 2005. "Overconfidence in investment decisions: An experimental approach," The European Journal of Finance, Taylor & Francis Journals, pages 471-491.
    3. Adam S. Goodie & Diana L. Young, 2007. "The skill element in decision making under uncertainty: Control or competence?," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 2, pages 189-203, June.
    4. Marion Eberlein & Judith Przemeck, 2008. "Whom will you choose? - Collaborator Selection and Selector’s Self-Prediction," Bonn Econ Discussion Papers bgse12_2008, University of Bonn, Germany.

    More about this item

    Keywords

    Investment decisions; Portfolio selection; Overconfidence; Unrealistic optimism; Illusion of control; Endowment effect;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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