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Testing for Overconfidence Statistically: A Moment Inequality Approach

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  • Yanchun Jin
  • Ryo Okui

Abstract

We propose an econometric procedure to test for the presence of overconfidence using data collected by ranking experiments. Our approach applies the techniques from the moment inequality literature. Although a ranking experiment is a typical way to collect data for the analysis of overconfidence, Benoit and Dubra (2011) show that a ranking experiment may generate data that indicate overconfidence even if participants are purely rational Bayesian updaters. Instead, the authors provide a set of inequalities that are consistent with purely rational Bayesian updaters. We propose the application of the tests of moment inequalities developed by Romano et al. (2014) to test such a set of inequalities. Then, we examine the data from Svenson (1981) on driving safety. Our results indicate the presence of overconfidence with respect to safety among US subjects tested by Svenson. However, other cases tested do not show evidence of overconfidence. We also apply our method to re-examine and confirm the results of Benoit et al. (2015).

Suggested Citation

  • Yanchun Jin & Ryo Okui, 2019. "Testing for Overconfidence Statistically: A Moment Inequality Approach," Working Paper Series no116, Institute of Economic Research, Seoul National University.
    • Handle: RePEc:snu:ioerwp:no116
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    Cited by:

    1. Ryo Okui, 2021. "A moment inequality approach to statistical inference for rankings," The Japanese Economic Review, Springer, vol. 72(2), pages 169-184, April.
    2. Kishishita, Daiki & Yamagishi, Atsushi & Matsumoto, Tomoko, 2023. "Overconfidence, income-ability gap, and preferences for income equality," European Journal of Political Economy, Elsevier, vol. 77(C).

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    More about this item

    Keywords

    overcon?dence; ranking experiments; moment inequality; driving safety;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • R41 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Transportation: Demand, Supply, and Congestion; Travel Time; Safety and Accidents; Transportation Noise

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