Overconfidence in investment decisions: An experimental approach

By Dennis A. V. Dittrich, W. Gueth, Boris Maciejovsky. Social Science Research Network, 2005

167 citations recorded by the source corpus.

Abstract By experimentally inducing risk aversion, overconfidence in an investment setting is investigated, comparing the evaluation of actual investment decisions with alternative choices. After selecting their own investment, subjects confront three alternative investment choices, including the optimal one, and are asked about their willingness to pay and to substitute their own for alternative choices. Overconfidence is defined as the persistent overevaluation of the own investment decision. Results indicate that overconfidence increases (i) with the absolute deviation from optimal choices, (ii) with task complexity involving the number of risky assets, and (iii) decreases with individual perceived uncertainty.

Subfields: Economics and Econometrics, General Decision Sciences, Safety Research

View Paper: https://www.semanticscholar.org/paper/2682d689c777cbf91f15b8f44b9b0cb50934c75b

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Citations in the corpus

The influence of risk perception, risk tolerance, overconfidence, and loss aversion towards investment decision making (2019, background): “…of overconfidence tends to be more courageous in making investment decisions and allocating funds to high risk assets because of the very supportive level of confidence (Breuer, Riesener, & Salzmann, 2014; Dittrich et al., 2005), although the end the results of the investment is less than expected.”
Impact of herding behavior and overconfidence bias on investors’ decision-making in Pakistan (2019, unknown): “Dittrich et al. (2005) investigated the impact of overconfidence and risk aversion on the investment decision.”
Restraining Overconfident CEOs through Improved Governance: Evidence from the Sarbanes-Oxley Act (2015, unknown): “The downside is that overconfidence can lead to faulty assessments of investment value and risk, resulting in suboptimal decision making (Dittrich et al., 2005).”
Executive Overconfidence and Compensation Structure (2015, unknown): “Overconfident CEOs are prone to overestimate returns to investments and to underestimate risks (Dittrich et al., 2005; Malmendier and Tate, 2005, 2008; Kolasinski and Li, 2013).”
Personality aspects of entrepreneurship: A look at five meta-analyses. (2011, unknown): “Examples of experiments that have some afﬁnity to the tasks of entrepreneurs are Dittrich, Güth, and Maciejovski (2005) for investment decisions and Dimov (2007) for entrepreneurial opportunity perception and action.”