Overconfidence, Experience, and Professionalism: An Experimental Study

This paper presents an online-experiment on overconfidence in the context of financial markets. Our subject pool consists of institutional investors, investment advisors and individual investors, all of them being registered users of a large online platform for market sentiment data. Due to their registration, several socioeconomic characteristics of participants can be controlled for in our analysis. It turns out that there are stable differences in overconfidence between the three investor groups. Moreover, investment experience and age have a significant impact on the degree of overconfidence which goes surprisingly in opposite direction. We argue that these results have important implications for studies analyzing the impact of experience on behavior in (financial) markets.

[1]  J. Yates,et al.  General knowledge overconfidence : Cross-national variations, response style, and reality , 1997 .

[2]  Glenn Ellison,et al.  Are some mutual fund managers better than others , 1999 .

[3]  Patrick J. Dennis,et al.  Who Blinks in Volatile Markets, Individuals or Institutions? , 2000 .

[4]  Thomas Langer,et al.  Overconfidence of Professionals and Lay Men : Individual Differences Within and Between Tasks? , 2005 .

[5]  Brad M. Barber,et al.  Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment , 1998 .

[6]  Peter R. Locke,et al.  House Money and Overconfidence on the Trading Floor , 2001 .

[7]  Glenn Ellison,et al.  Are Some Mutual Funds Managers Better than Others? Cross-Sectional Patterns in Behavior and Performance , 1996 .

[8]  Peter R. Locke,et al.  Professional trader discipline and trade disposition , 2005 .

[9]  John A. List,et al.  Auction mechanisms and the measurement of WTP and WTA , 2001 .

[10]  Lazar Stankov,et al.  Age differences in the realism of confidence judgements: A calibration study using tests of fluid and crystallized intelligence , 1996 .

[11]  W. Greene,et al.  计量经济分析 = Econometric analysis , 2009 .

[12]  Steffen Meyer,et al.  Trading on Advice , 2010 .

[13]  Jorge Frascara.  Cognition, Emotion, and Other Inescapable Dimensions of Human Experience. , 1999 .

[14]  Thomas Langer,et al.  True Overconfidence in Interval Estimates: Evidence Based on a New Measure of Miscalibration , 2012 .

[15]  Lukas Menkhoff,et al.  The impact of experience on risk taking, overconfidence, and herding of fund managers: Complementary survey evidence , 2006 .

[16]  Thomas Langer,et al.  Framing Effects in Stock Market Forecasts: The Difference Between Asking for Prices and Asking for Returns , 2007 .

[17]  Markus Glaser,et al.  Overconfidence and trading volume , 2003 .

[18]  O. Svenson.  ARE WE ALL LESS RISKY AND MORE SKILLFUL THAN OUR FELLOW DRIVERS , 1981 .

[19]  Terrance Odean,et al.  Volume, Volatility, Price, and Profit When All Traders are Above Average , 1998 .

[20]  S. Lichtenstein,et al.  Do those who know more also know more about how much they know?*1 , 1977 .

[21]  Boris Maciejovsky,et al.  Simultaneous Over- and Underconfidence: Evidence from Experimental Asset Markets , 2001 .

[22]  John A List,et al.  A simple test of expected utility theory using professional traders. , 2005, Proceedings of the National Academy of Sciences of the United States of America.

[23]  Mark S. Seasholes,et al.  Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets , 2005 .

[24]  Jack B. Soll,et al.  Overconfidence: It Depends on How, What, and Whom You Ask. , 1999, Organizational behavior and human decision processes.

[25]  Jonathan E. Alevy,et al.  Information cascades: Evidence from a field experiment with financial market professionals , 2005 .

[26]  A. Tversky,et al.  Preference and belief: Ambiguity and competence in choice under uncertainty , 1991 .

[27]  Terrance Odean,et al.  Learning to Be Overconfident , 1997 .

[28]  B. Fischhoff,et al.  Calibration of probabilities: the state of the art to 1980 , 1982 .

[29]  Bruno Biais,et al.  Judgmental Overconfidence, Self-Monitoring and Trading Performance in an Experimental Financial Market , 2005 .

[30]  Bing Liang.  On the Performance of Hedge Funds , 1998 .

[31]  Martin Weber,et al.  On the Trend Recognition and Forecasting Ability of Professional Traders , 2003, Decis. Anal..

[32]  S. Mutter,et al.  Age differences in the accuracy of confidence judgments. , 1996, Experimental aging research.

[33]  Alok Kumar,et al.  Do Older Investors Make Better Investment Decisions? , 2009, The Review of Economics and Statistics.

[34]  G. Harrison,et al.  Field experiments , 1924, The Journal of Agricultural Science.

[35]  Mark Grinblatt,et al.  Sensation Seeking, Overconfidence, and Trading Activity , 2006 .

[36]  조성구,et al.  On the Calibration of Probabilities , 1987 .

[37]  A. Tversky,et al.  Options traders exhibit subadditive decision weights , 1996 .

[38]  Andreas Hackethal,et al.  Financial Advisors: A Case of Babysitters? , 2009, SSRN Electronic Journal.

[39]  Arthur C. Allen,et al.  Does the Quality of Financial Advice Affect Prices? , 2010 .

[40]  Gokul Bhandari,et al.  The Demographics of Overconfidence , 2006 .

[41]  R F Job,et al.  The application of learning theory to driving confidence: the effect of age and the impact of random breath testing. , 1990, Accident; analysis and prevention.

[42]  Christopher Hertzog,et al.  Distinguishing age differences in knowledge, strategy use, and confidence during strategic skill acquisition. , 2004, Psychology and aging.

[43]  Winston R. Sieck,et al.  Organizational Behavior and Human Decision Processes Cross-cultural Variations in Probability Judgment Accuracy: beyond General Knowledge Overconfidence? , 2022 .

[44]  Jack B. Soll.  Determinants of Overconfidence and Miscalibration: The Roles of Random Error and Ecological Structure☆ , 1996 .

[45]  Nigel Harvey,et al.  Blackwell Handbook of Judgment and Decision Making , 2004 .

[46]  Liang-Bing,et al.  On the Performance of Hedge Funds , 2006 .

[47]  A. Tversky,et al.  Judgment under Uncertainty: Heuristics and Biases , 1974, Science.

[48]  D. Hirshleifer,et al.  Behavioral Finance , 2014, Encyclopedia of Sustainable Management.

[49]  Robert Sugden,et al.  Do Anomalies Disappear in Repeated Markets , 2002 .

[50]  Lars-Göran Nilsson,et al.  Adult age differences in the realism of confidence judgments: overconfidence, format dependence, and cognitive predictors. , 2008, Psychology and aging.

[51]  John A. List,et al.  Do professional traders exhibit myopic loss aversion? An experimental analysis , 2005 .

[52]  Franklin R. Edwards,et al.  Hedge Fund Performance and Manager Skill , 2001 .

[53]  R I Benjamin,et al.  Critical IT (information technology) issues: the next ten years. , 1992, Sloan management review.

[54]  Martin Dufwenberg,et al.  Bubbles and Experience: An Experiment , 2005 .

[55]  Miguel A. Vadillo,et al.  Illusion of Control , 2013, Experimental psychology.

[56]  C. Plott,et al.  The Willingness to Pay-Willingness to Accept Gap, the 'Endowment Effect,' Subject Misconceptions, and Experimental Procedures for Eliciting Valuations , 2005 .

[57]  A. Greenwald.  The totalitarian ego: Fabrication and revision of personal history. , 1980 .

[58]  M. Sutter,et al.  Is more information always better?: Experimental financial markets with cumulative information , 2008 .