IDEAS home Printed from https://ideas.repec.org/p/not/notcdx/2014-05.html
   My bibliography  Save this paper

How do risk attitudes affect measured confidence?

Author

Listed:
  • Zahra Murad

    () (School of Economics, University of Nottingham)

  • Chris Starmer

    () (Department of Economics, University of Amsterdam)

  • Martin Sefton

    () (School of Economics, University of Nottingham)

Abstract

We examine confidence in own absolute performance using two elicitation procedures: self-reported (non-incentivised) confidence and an incentivised procedure that elicits the certainty equivalent of a bet based on performance. The former procedure reproduces the "hard-easy effect" (overconfidence in easy tasks and underconfidence in hard tasks) found in a large number of studies using non-incentivised self-reports. The latter procedure produces general underconfidence, which is somewhat reduced when we filter out the effects of risk attitudes. However, even after controlling for risk attitudes our incentivised procedure leads to significant underconfidence, and does not lead to better calibration between confidence and performance than non-incentivised self-reports. Finally, we find that self-reported confidence correlates significantly with features of individual risk attitudes including parameters of individual probability weighting.

Suggested Citation

  • Zahra Murad & Chris Starmer & Martin Sefton, 2014. "How do risk attitudes affect measured confidence?," Discussion Papers 2014-05, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  • Handle: RePEc:not:notcdx:2014-05
    as

    Download full text from publisher

    File URL: https://www.nottingham.ac.uk/cedex/documents/papers/cedex-discussion-paper-2015-26.pdf
    File Function: Revised Version, November 2015
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Steffen Andersen & John Fountain & Glenn Harrison & E. Rutström, 2014. "Estimating subjective probabilities," Journal of Risk and Uncertainty, Springer, vol. 48(3), pages 207-229, June.
    2. Guillaume Hollard & Sébastien Massoni & Jean-Christophe Vergnaud, 2010. "Subjective beliefs formation and elicitation rules : experimental evidence," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00543828, HAL.
    3. Ulrike Malmendier & Geoffrey Tate, 2005. "CEO Overconfidence and Corporate Investment," Journal of Finance, American Finance Association, vol. 60(6), pages 2661-2700, December.
    4. Mohammed Abdellaoui & Olivier L'Haridon & Corina Paraschiv, 2011. "Experienced vs. Described Uncertainty: Do We Need Two Prospect Theory Specifications?," Management Science, INFORMS, vol. 57(10), pages 1879-1895, October.
    5. Theo Offerman & Joep Sonnemans & Gijs Van De Kuilen & Peter P. Wakker, 2009. "A Truth Serum for Non-Bayesians: Correcting Proper Scoring Rules for Risk Attitudes ," Review of Economic Studies, Oxford University Press, vol. 76(4), pages 1461-1489.
    6. Hirshleifer, David & Daniel, Kent, 2015. "Overconfident investors, predictable returns, and excessive trading," MPRA Paper 69002, University Library of Munich, Germany.
    7. Montizaan, Raymond M. & Vendrik, Maarten C.M., 2014. "Misery Loves Company: Exogenous shocks in retirement expectations and social comparison effects on subjective well-being," Journal of Economic Behavior & Organization, Elsevier, vol. 97(C), pages 1-26.
    8. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    9. Jeremy Clark & Lana Friesen, 2009. "Overconfidence in Forecasts of Own Performance: An Experimental Study," Economic Journal, Royal Economic Society, vol. 119(534), pages 229-251, January.
    10. Alba, Joseph W & Hutchinson, J Wesley, 2000. " Knowledge Calibration: What Consumers Know and What They Think They Know," Journal of Consumer Research, Oxford University Press, vol. 27(2), pages 123-156, September.
    11. Anke Becker & Thomas Deckers & Thomas Dohmen & Armin Falk & Fabian Kosse, 2012. "The Relationship Between Economic Preferences and Psychological Personality Measures," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 453-478, July.
    12. Olivier Compte & Andrew Postlewaite, 2004. "Confidence-Enhanced Performance," American Economic Review, American Economic Association, vol. 94(5), pages 1536-1557, December.
    13. Dickinson, David L., 2006. "The chilling effect of optimism: The case of final-offer arbitration," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 35(1), pages 17-30, February.
    14. Guillaume Hollard & Sébastien Massoni & Jean-Christophe Vergnaud, 2016. "In search of good probability assessors: an experimental comparison of elicitation rules for confidence judgments," Theory and Decision, Springer, vol. 80(3), pages 363-387, March.
    15. Kent Daniel & David Hirshleifer, 2015. "Overconfident Investors, Predictable Returns, and Excessive Trading," Journal of Economic Perspectives, American Economic Association, vol. 29(4), pages 61-88, Fall.
    16. Michael D. Grubb, 2015. "Overconfident Consumers in the Marketplace," Journal of Economic Perspectives, American Economic Association, vol. 29(4), pages 9-36, Fall.
    17. Muriel Niederle & Lise Vesterlund, 2007. "Do Women Shy Away From Competition? Do Men Compete Too Much?," The Quarterly Journal of Economics, Oxford University Press, vol. 122(3), pages 1067-1101.
    18. 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.
    19. Thomas Epper & Helga Fehr-Duda & Adrian Bruhin, 2011. "Viewing the future through a warped lens: Why uncertainty generates hyperbolic discounting," Journal of Risk and Uncertainty, Springer, vol. 43(3), pages 169-203, December.
    20. Steffen Andersen & Glenn Harrison & Morten Lau & E. Rutström, 2009. "Elicitation using multiple price list formats," Experimental Economics, Springer;Economic Science Association, vol. 12(3), pages 365-366, September.
    21. Juan Dubra, 2004. "Optimism and Overconfidence in Search," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(1), pages 198-218, January.
    22. Helga Fehr-Duda & Adrian Bruhin & Thomas Epper & Renate Schubert, 2010. "Rationality on the rise: Why relative risk aversion increases with stake size," Journal of Risk and Uncertainty, Springer, vol. 40(2), pages 147-180, April.
    23. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
    24. Merkle, Christoph & Weber, Martin, 2011. "True overconfidence: The inability of rational information processing to account for apparent overconfidence," Organizational Behavior and Human Decision Processes, Elsevier, vol. 116(2), pages 262-271.
    25. Olsson, Henrik, 2014. "Measuring overconfidence: Methodological problems and statistical artifacts," Journal of Business Research, Elsevier, vol. 67(8), pages 1766-1770.
    26. repec:exc:wpaper:2013-05 is not listed on IDEAS
    27. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, Oxford University Press, vol. 75(4), pages 643-669.
    28. Aukutsionek, Sergei P. & Belianin, Alexis V., 2001. "Quality of forecasts and business performance: A survey study of Russian managers," Journal of Economic Psychology, Elsevier, vol. 22(5), pages 661-692, October.
    29. Simon Gervais & J. B. Heaton & Terrance Odean, 2011. "Overconfidence, Compensation Contracts, and Capital Budgeting," Journal of Finance, American Finance Association, vol. 66(5), pages 1735-1777, October.
    30. Lattimore, Pamela K. & Baker, Joanna R. & Witte, Ann D., 1992. "The influence of probability on risky choice: A parametric examination," Journal of Economic Behavior & Organization, Elsevier, vol. 17(3), pages 377-400, May.
    31. Wakker,Peter P., 2010. "Prospect Theory," Cambridge Books, Cambridge University Press, number 9780521765015, April.
    32. Adrian Bruhin & Helga Fehr-Duda & Thomas Epper, 2010. "Risk and Rationality: Uncovering Heterogeneity in Probability Distortion," Econometrica, Econometric Society, vol. 78(4), pages 1375-1412, July.
    33. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    34. Robin Cubitt & Chris Starmer & Robert Sugden, 1998. "On the Validity of the Random Lottery Incentive System," Experimental Economics, Springer;Economic Science Association, vol. 1(2), pages 115-131, September.
    35. Ulrike Malmendier & Geoffrey Tate, 2015. "Behavioral CEOs: The Role of Managerial Overconfidence," Journal of Economic Perspectives, American Economic Association, vol. 29(4), pages 37-60, Fall.
    36. Pamela K. Lattimore & Joanna R. Baker & A. Dryden Witte, 1992. "The Influence Of Probability on Risky Choice: A parametric Examination," NBER Technical Working Papers 0081, National Bureau of Economic Research, Inc.
    37. Herz, Holger & Schunk, Daniel & Zehnder, Christian, 2014. "How do judgmental overconfidence and overoptimism shape innovative activity?," Games and Economic Behavior, Elsevier, vol. 83(C), pages 1-23.
    38. Rustichini, Aldo & DeYoung, Colin G. & Anderson, Jon E. & Burks, Stephen V., 2012. "Toward the Integration of Personality Theory and Decision Theory in the Explanation of Economic and Health Behavior," IZA Discussion Papers 6750, Institute for the Study of Labor (IZA).
    39. Ludwig, Sandra & Wichardt, Philipp C. & Wickhorst, Hanke, 2011. "Overconfidence can improve an agent's relative and absolute performance in contests," Economics Letters, Elsevier, vol. 110(3), pages 193-196, March.
    40. Andrea Isoni & Graham Loomes & Robert Sugden, 2011. "The Willingness to Pay—Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations: Comment," American Economic Review, American Economic Association, vol. 101(2), pages 991-1011, April.
    41. D. Urbig & J. Stauf & U. Weitzel, 2009. "What is your level of overconfidence? A strictly incentive compatible measurement of absolute and relative overconfidence," Working Papers 09-20, Utrecht School of Economics.
    42. Erik Hoelzl & Aldo Rustichini, 2005. "Overconfident: Do You Put Your Money On It?," Economic Journal, Royal Economic Society, vol. 115(503), pages 305-318, April.
    43. Alberto Galasso & Timothy S. Simcoe, 2011. "CEO Overconfidence and Innovation," Management Science, INFORMS, vol. 57(8), pages 1469-1484, August.
    44. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
    45. 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.
    46. Pavlo Blavatskyy, 2009. "Betting on own knowledge: Experimental test of overconfidence," Journal of Risk and Uncertainty, Springer, vol. 38(1), pages 39-49, February.
    47. Rachel Croson & Uri Gneezy, 2009. "Gender Differences in Preferences," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 448-474, June.
    48. Dan Lovallo & Colin Camerer, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. How do risk attitudes affect measured confidence?
      by Alessandro Cerboni in Knowledge Team on 2014-08-10 01:55:25

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Barron, Kai & Gravert, Christina, 2018. "Confidence and Career Choices: An Experiment," Working Papers in Economics 715, University of Gothenburg, Department of Economics.
    2. Cheung, Stephen L. & Johnstone, Lachlan, 2017. "True Overconfidence, Revealed through Actions: An Experiment," IZA Discussion Papers 10545, Institute for the Study of Labor (IZA).
    3. repec:kap:theord:v:84:y:2018:i:3:d:10.1007_s11238-017-9623-y is not listed on IDEAS
    4. Barron, Kai & Gravert, Christina, 2018. "Beliefs and actions: How a shift in confidence affects choices," MPRA Paper 84743, University Library of Munich, Germany.
    5. repec:eee:jbfina:v:84:y:2017:i:c:p:68-87 is not listed on IDEAS

    More about this item

    Keywords

    Overconfidence; Underconfidence; Experiment; Risk Preferences;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:not:notcdx:2014-05. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Suzanne Robey). General contact details of provider: http://edirc.repec.org/data/cdnotuk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.