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Ambiguity and Gender Differences in Financial Decision Making: An Experimental Examination of Competence and Confidence Effects

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This paper reports the results of an experiment that brings together psychological measures of competence and overconfidence with laboratory economic measures of individual valuations of uncertainty. We examine the valuations of risky and ambiguous lotteries in a financial decision context. The experiment can be viewed in two parts. The first part replicates an experimental design reported by Heath and Tversky (1991) but within a financial market context. This part produces two measures: 1) competence, the perception of feeling knowledgeable or competent in an area and 2) overconfidence, the well documented result that many individuals overestimate their ability. These measures, together with an indicator of objective knowledge, were used to explain elicited certainty equivalents in the second part of the experiment. Certainty equivalents were elicited for lotteries that were contingent on the price movements of real stock and bond funds, the price changes of simulated virtual funds, and pure risk lotteries. These represent three different levels of uncertainty: two-sided ambiguity, one-sided ambiguity and pure risk. Our results show a significant relationship between individual overconfidence and competence measures and elicited values of lotteries in a financial decision context. Further, the interaction of overconfidence, competence and knowledge measures with gender produce nearly opposite effects.

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  • Matthias Gysler & Jamie Kruse & Renate Schubert, 2002. "Ambiguity and Gender Differences in Financial Decision Making: An Experimental Examination of Competence and Confidence Effects," CER-ETH Economics working paper series 02/23, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  • Handle: RePEc:eth:wpswif:02-23
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    2. Brink, Siegrun & Kriwoluzky, Silke & Bijedic, Teita & Ettl, Kerstin & Welter, Friederike, 2014. "Gender, Innovation und Unternehmensentwicklung," IfM-Materialien 228, Institut für Mittelstandsforschung (IfM) Bonn.
    3. Francis, Bill & Hasan, Iftekhar & Wu, Qiang & Yan, Meng, 2014. "Are female CFOs less tax aggressive? Evidence from tax aggressiveness," Research Discussion Papers 16/2014, Bank of Finland.
    4. Fellner, Gerlinde & Maciejovsky, Boris, 2007. "Risk attitude and market behavior: Evidence from experimental asset markets," Journal of Economic Psychology, Elsevier, vol. 28(3), pages 338-350, June.
    5. Zheng Fang & Chris Sakellariou, 2015. "Glass Ceilings versus Sticky Floors: Evidence from Southeast Asia and an International Update," Asian Economic Journal, East Asian Economic Association, vol. 29(3), pages 215-242, September.
    6. Arcidiacono, Davide, 2011. "Consumer rationality in a multidisciplinary perspective," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 40(5), pages 516-522.
    7. Megan Endres, 2006. "The Effectiveness of Assigned Goals in Complex Financial Decision Making and the Importance of Gender," Theory and Decision, Springer, vol. 61(2), pages 129-157, September.
    8. Muriel Niederle, 2014. "Gender," NBER Working Papers 20788, National Bureau of Economic Research, Inc.
    9. Jung, SeEun & Choe, Chung & Oaxaca, Ronald L., 2018. "Gender wage gaps and risky vs. secure employment: An experimental analysis," Labour Economics, Elsevier, vol. 52(C), pages 112-121.
    10. Mago, Shakun D. & Razzolini, Laura, 2019. "Best-of-five contest: An experiment on gender differences," Journal of Economic Behavior & Organization, Elsevier, vol. 162(C), pages 164-187.
    11. Asiedu, Edward & Ibanez, Marcela, 2014. "The weaker sex? Gender differences in punishment across Matrilineal and Patriarchal Societies," GlobalFood Discussion Papers 165743, Georg-August-Universitaet Goettingen, GlobalFood, Department of Agricultural Economics and Rural Development.
    12. Bruno Biais & Denis Hilton & Karine Mazurier & Sébastien Pouget, 2005. "Judgemental Overconfidence, Self-Monitoring, and Trading Performance in an Experimental Financial Market," Review of Economic Studies, Oxford University Press, vol. 72(2), pages 287-312.
    13. Philip J. Grossman & Mana Komai & James E. Jensen, 2015. "Leadership and gender in groups: An experiment," Canadian Journal of Economics, Canadian Economics Association, vol. 48(1), pages 368-388, February.
    14. Aggarwal, Divya & Damodaran, Uday, 2020. "Ambiguity attitudes and myopic loss aversion: Experimental evidence using carnival games," Journal of Behavioral and Experimental Finance, Elsevier, vol. 25(C).
    15. Hermansson, Cecilia & Jonsson, Sara, 2019. "The impact of financial literacy and financial interest on risk tolerance," Working Paper Series 19/9, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    16. Hermansson, Cecilia & Jonsson, Sara, 2021. "The impact of financial literacy and financial interest on risk tolerance," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    17. Michailova, Julija, 2010. "Overconfidence, Risk Aversion and Individual Financial Decisions in Experimental Asset Markets," MPRA Paper 53114, University Library of Munich, Germany, revised Jan 2014.
    18. Titilola I. Egbuwe & Barisua F. Nwinee, 2019. "Gender Impact on Execution of Business Strategy for Effective Economic Performance in Nigeria," International Journal of Science and Business, IJSAB International, vol. 3(3), pages 141-150.
    19. Helga Fehr-Duda & Manuele Gennaro & Renate Schubert, 2006. "Gender, Financial Risk, and Probability Weights," Theory and Decision, Springer, vol. 60(2), pages 283-313, May.

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