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Hindsight Bias, Risk Perception, and Investment Performance

Listed author(s):
  • Biais Bruno

    ()

    (CRM - Centre de Recherches en Management - CNRS - Institut d'Administration des Entreprises (IAE) - Toulouse - UT1 - Université Toulouse 1 Capitole)

  • Martin Weber

    ()

Once they have observed information, hindsight-biased agents fail to remember how ignorant they were initially; "they knew it all along." We formulate a theoretical model of this bias, providing a foundation for empirical measures and implying that hindsight-biased agents learning about volatility will underestimate it. In an experiment involving 66 students from Mannheim University, we find that hindsight bias reduces volatility estimates. In another experiment, involving 85 investment bankers in London and Frankfurt, we find that more biased agents have lower performance. These findings are robust to differences in location, information, overconfidence, and experience

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Paper provided by HAL in its series Post-Print with number halshs-00491137.

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Length:
Date of creation: 2009
Publication status: Published in Management Science, INFORMS, 2009, 55 (6), pp.1018-1029
Handle: RePEc:hal:journl:halshs-00491137
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00491137
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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  1. Klayman, Joshua & Soll, Jack B. & Gonzalez-Vallejo, Claudia & Barlas, Sema, 1999. "Overconfidence: It Depends on How, What, and Whom You Ask, , , , , , , , ," Organizational Behavior and Human Decision Processes, Elsevier, vol. 79(3), pages 216-247, September.
  2. George Loewenstein & Ted O'Donoghue & Matthew Rabin, 2003. "Projection Bias in Predicting Future Utility," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1209-1248.
  3. Camerer, Colin F & Hogarth, Robin M, 1999. "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 7-42, December.
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  5. Glaser, Markus & Langer, Thomas & Weber, Martin, 2005. "Overconfidence of Professionals and Lay Men: Individual Differences Within and Between Tasks?," Sonderforschungsbereich 504 Publications 05-25, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  6. 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.
  7. Camerer, Colin F, 1987. "Do Biases in Probability Judgment Matter in Markets? Experimental Evidence," American Economic Review, American Economic Association, vol. 77(5), pages 981-997, December.
  8. John A. List, 2003. "Does Market Experience Eliminate Market Anomalies?," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 41-71.
  9. Donald L. Keefer & Samuel E. Bodily, 1983. "Three-Point Approximations for Continuous Random Variables," Management Science, INFORMS, vol. 29(5), pages 595-609, May.
  10. Camerer, Colin & Loewenstein, George & Weber, Martin, 1989. "The Curse of Knowledge in Economic Settings: An Experimental Analysis," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1232-1254, October.
  11. Weber, Martin & Mangelsdorff, Lukas, 1998. "Hindsight-Bias im Prinzipal-Agent-Kontext: Die Aktennotiz als Antwort?," Sonderforschungsbereich 504 Publications 98-03, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
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