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Overconfidence, Risk Aversion and Individual Financial Decisions in Experimental Asset Markets

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  • Michailova, Julija

Abstract

We investigate the influence of overconfidence and risk aversion on individual financial decision making in the experimental asset markets of the Smith, Suchanek and Williams (1988) type, with no informational asymmetries. Subjects, based on their pre-experimental overconfidence scores, were assigned to the two types of markets: least overconfident subjects formed five “rational” markets and most overconfident subjects formed five “overconfident” markets. The asset market experiment was followed by post hoc risk aversion measurement. Our results revealed that in the suggested setting, performance and trading activity were overconfidence dependent only for female participants. Mistakes in price forecasting, that are negatively correlated with overconfidence, could partially account for the increase in trading activity and losses. In the decreased sample differences in individual outcomes were overconfidence and not risk aversion driven.

Suggested Citation

  • 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.
  • Handle: RePEc:pra:mprapa:53114
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    Cited by:

    1. Mike Farjam & Oliver Kirchkamp, 2015. "Bubbles in Hybrid Markets - How Expectations about Algorithmic Trading Affect Human Trading," CESifo Working Paper Series 5631, CESifo Group Munich.
    2. da Gama Batista, João & Massaro, Domenico & Bouchaud, Jean-Philippe & Challet, Damien & Hommes, Cars, 2017. "Do investors trade too much? A laboratory experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 140(C), pages 18-34.

    More about this item

    Keywords

    overconfidence; miscalibration; overprecision; risk aversion; financial decisions; economic experiments;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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