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Overconfidence in Psychology and Finance – an Interdisciplinary Literature Review

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  • Skala, Dorota

Abstract

This paper reviews the literature on one of the most meaningful concepts in modern behavioural finance, the overconfidence phenomenon. Overconfidence is presented as a well-developed psychological theory, with main facets comprising miscalibration, betterthan- average effect, illusion of control and unrealistic optimism. The primary applications of overconfidence in contemporary finance are analysed, from the perspective of financial markets and corporate behaviour. Experimental studies, formal models and analyses of market data demonstrate that overconfidence at least partially solves some financial market puzzles that cannot be accounted for by standard economic theory. Overconfidence in the corporate context may affect not only a company’s internal financing structure, but also its interactions with other market participants through merger and acquisition activity.

Suggested Citation

  • Skala, Dorota, 2008. "Overconfidence in Psychology and Finance – an Interdisciplinary Literature Review," MPRA Paper 26386, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:26386
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    File URL: https://mpra.ub.uni-muenchen.de/26386/1/MPRA_paper_26386.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Heller, Yuval, 2010. "Overconfidence and risk dispersion," MPRA Paper 25893, University Library of Munich, Germany.
    2. repec:nbp:nbpbik:v:48:y:2017:i:2:p:173-196 is not listed on IDEAS
    3. Harrison, Neil & Agnew, Steve & Serido, Joyce, 2015. "Attitudes to debt among indebted undergraduates: A cross-national exploratory factor analysis," Journal of Economic Psychology, Elsevier, vol. 46(C), pages 62-73.
    4. repec:prg:jnlpol:v:2017:y:2017:i:4:id:1155:p:460-475 is not listed on IDEAS
    5. Dumitriu, Ramona & Stefanescu, Razvan & Nistor, Costel, 2012. "Reactions of the capital markets to the shocks before and during the global crisis," MPRA Paper 41540, University Library of Munich, Germany, revised 10 Jan 2012.
    6. Bertrand Koebel & André Schmitt & Sandrine Spaeter, 2016. "DO SELF-THEORIES ON INTELLIGENCE EXPLAIN OVERCONFIDENCE AND RISK TAKING? A Field Experiment," Working Papers of BETA 2016-11, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    7. repec:eco:journ1:2017-02-02 is not listed on IDEAS
    8. Stefanescu, Razvan & Dumitriu, Ramona & Nistor, Costel, 2012. "Overreaction and underreaction on the BUCHAREST STOCK EXCHANGE," MPRA Paper 41555, University Library of Munich, Germany, revised 25 Sep 2012.
    9. Vetter, J. & Benlian, Alexander & Hess, T., 2011. "Overconfidence in IT Investment Decisions: Why Knowledge can be Boon and Bane at the same Time," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 58030, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).

    More about this item

    Keywords

    overconfidence; behavioral finance; investor psychology; financial markets; corporate policies; overconfident investors;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • G00 - Financial Economics - - General - - - General

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