Dennis Dittrich, Werner Güth, Boris Maciejovsky. Overconfidence in Investment Decisions: An Experimental Approach

Dennis Dittrich, Werner Güth, Boris Maciejovsky. Overconfidence in Investment Decisions: An Experimental Approach


The evidence on decision biases and heuristics challenges the prescriptive validity of standard finance theory which is still the dominant paradigm in modern finance. One such violation is the overcon fidence bias in the sense of systematically overestimating the accuracy of one's decisions and the precision of one's knowledge. Overconfidence has been observed in many professionals (for a survey see Yates (1990)). Most relevant for our study, overconfidence was found in entrepreneurs (Cooper et al. 1988), investment bankers (Stael von Holstein 1972) and managers (Russo and Schoemaker 1992). In particular, individuals were found to overestimate the precision of their knowledge (Fischho® et al. 1977). Overconfidence was found to be strongest for questions of moderate to extreme difficulty (Grifin and Tversky 1992), and seems to increase with the personal importance of the task (Frank 1935). People were also more confident of their predictions in fields where they have self-declared expertise (Heath and Tversky 1991). Overcon fidence has been explained by selective information searching strategies (e.g., Koriat et al. 1980), by motivational factors (e.g., Langer 1975), by imperfections in learning (e.g., Erev et al. 1994, Ferrell 1994), and, for instance, by the experimenters' tendency to choose harder-than-normal questions (e.g., Gigerenzer et al. 1991, Juslin 1993, 1994).


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Keywords: Behavioral Economics, Decision Making Theory, Experimental Economics

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