Lecture 7 - Overconfidence

when does overconfidence arise?

When one does know their own limits

what is miscalibration?

systematic deviation from perfect calibration leading to unwarranted beliefs in correctness of one’s answer (it is evidence of overconfidence)

What is the better than average effect?

people think of themselves as possessing above average abilities compared to others (this holds with regard to skills or positive personal traits

What is the illusion of control?

exaggeration of the degree to which one can control their own fate

what is optimism?

optimism is when people underestimate the likelihood of bad outcomes over which they have no control

what are the 4 factors influencing overconfidence?

1. complexity

2. amount of feedback given

3. motivation level of participants

4. skill of the participants

how does complexity effect overconfidence?

as tasks get harder, overconfidence increases

How does amount of feedback effect overconfidence?

Timely feedback reduces bias towards overconfidence

How does motivation effect overconfidence?

increasing the stakes in judgement tasks has been shown to have mixed results on overconfidence

how does skill/knowledge in a topic effect overconfidence?

It is seen that there is often greater overconfidence for tasks in subjects theyre considered to have more expertise

what is overconfidences effect in finance?

trading volumes increase, traders hold under-diversified portfolios, men are more overconfident than women

how is overconfidence modelled?

as overestimation of precision of one’s informationh

how does overconfidence play into the market as a whole?

It increases trading volume after bull markets

what is overconfidences effect on the individual level?

They end up selling stocks that go on to perform better than the ones they go onto buy (but this information does not analyse the aggregate performance of investors portfolios)

Why does increased trading from overconfidence reduce returns?

greater costs associated with high level of trading

what is self-attribution bias in men?

men tend to think their successes are as a result of their own skill rather than dumb luck and so become more confident

what is a limitation of empirical studies of overconfidence?

overconfidence can not be directly observed and has to be seen through proxies