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Overconfidence in Fınance wıth Different Domains: An Interdisciplinary Experimental Approach

Year 2014, Volume: 15 Issue: 1, 253 - 268, 25.04.2014

Serkan Şahin , Özlem Yılmaz

Abstract

Behavioral and experimental finance literature has grown by leaps and bounds in recent years. However, much work remains to be done in the field. In detecting behavioral biases and their effects on decision making process, experiments are very advantageous in that it is possible to obtain valuable findings about the biases of individuals in controlled laboratory settings. The purpose of this study is to search for the overconfidence bias of UK subjects and investigate whether overconfidence is domain specific. Results indicate that people are generally overconfident. Most of them see themselves above average and overestimate precision of their knowledge. In addition, it is found that individuals are less overconfident in the domain of finance.

Keywords

Behavioral Finance Experimental Finance and Overconfidence

References

  • ABREU, Margarida and Victor MENDES (2012), Information, Overconfidence and Trading: Do the Sources of Information Matter? Journal of Economic Psychology, Vol 33(4), 868–881.
  • AKINTOYE, Ishola Rufus (2008),“Efficient Market Hypothesis and Behavioral Finance: A Review of Literature”, European Journal of Social Sciences, Vol7(2), 7–17.
  • ALICKE, Mark; M.L.KLOTZ; David BREITENBECHER; Tiricia YURAK and Debbie VREDENBURG (1995), Personal Contact, Individuation and the Better-Than-Average Effect. Journal of Personality and Social Psychology, Vol 68(5), 804–825.
  • ALLEN, David and Dorla EVANS (2005),“Bidding and Overconfidence in Experimental Financial Markets”,The Journal of Behavioral Finance, Vol 6(3), 108–120.
  • BANZ, Rolf (1981),“The Relationship Between Return and Market Value of Common Stock. Journal of Financial Economics”, Vol 9(1), 3–18.
  • BARBERIS, Nicholas; Ming HUANG and Tano SANTOS (2001),“Prospect Theory and Asset Prices”, Quarterly Journal of Economics, Vol 116(1), 1–53.
  • BAR-TAL,Yoram; Anat SARID and Liat KISHON-RABIN (2001),“A Test of the Overconfidence Phenomenon Using Audio Signals”, Journal of General Psychology, Vol 128(1), 76–80.
  • BASU, Susanto (1977),“Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis”,The Journal of Finance, Vol 32(3), 663-682.
  • BERNARD, Victor and Jacob THOMAS (1989),“Post-Earnings-Announcement Drift: Delayed Price Response or Risk Premium?”, Journal of Accounting Research, Vol27 (Supplement), 1–36.
  • BIAIS, Buruno; Denis HILTON; Karine MAZURIER and Sébastien POUGET, (2005), “Judgmental Overconfidence, Self-Monitoring, and Trading Performance in an Experimental Financial Market”, The Review of Economic Studies, Vol 72(251), 287–312.
  • BOSSAERTS, Peter (2000),“Experiments with Financial Markets: Implications for Asset Pricing Theory”, Working Paper, available at http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.26.902&rep=rep1&type=pdf [accessed 24 Feb 2013].
  • CAMERER, Colin and Dan LOVALLO (1999),“Overconfidence and Excess Entry: An Experimental Approach”, American Economic Review, Vol 89(1), 306–318.
  • CHRISTENSEN-SZALANSKI, Jay and James BUSHYHEAD (1981),“Physicians' Use of Probabilistic Information in a Real Clinical Setting”, Journal of Experimental Psychology: Human Perception and Performance, Vol 7(4), 928–935.
  • CLAYSON, Dennis. (2005),“Performance Overconfidence: Metacognitive Effects or Misplaced Student Expectations?”, Journal of Marketing Education, Vol 27(2), 122–129.
  • DEAVES, Richard; Eric LÜDERS and Guo Ying LUO (2009),“An Experimental Test of the Impact of Overconfidence and Gender on Trading Activity”, Review of Finance, .Vol 13(3), 555–575.
  • DEBONDT, Wernerand RichardTHALER (1985), Does the Stock Market Overreact”, The Journal of Finance, Vol 40(3), 793–805.
  • FISCHHOFF, Baruch; Paul SLOVIC and Sarah LICHTENSTEIN (1977),“Knowing with Certainty: The Appropriateness of Extreme Confidence”, Journal of Experimental Psychology, Vol 3(4), 552–564.
  • FRENCH, Keneth (1980),”Stock Returns and the Weekend Effect. Journal of Financial Economics, Vol 8(1), 55–70, available at http://cdn.transtutors. com/UploadAssignments/324194_2_Stock-Returnsand-weekendeffect.pdf [accessed 27 Nov 2012].
  • GREENBERG, Joel (1986),“The “White Overalls” of Overconfidence. Science News”, Vol 129(19), 293.
  • HILTON, Denis; Isabelle RÉGNER; Laure CABANTOUS; Laetitia CHARALAMBIDES and Stéphane VAUTIER (2011),“Do Positive Illusions Predict Overconfidence in Judgment? A Test Using Interval Production and Probability Evaluation Measures of Miscalibration”, Journal of Behavioral Decision Making, Vol 24(2), 117–139.
  • HIROTA, Shin'ichi and Shyam SUNDER (2006),“Price Bubbles Sans Dividend Anchors: Evidence from Laboratory Stock Markets”, Yale ICF Working Paper No. 02-42 EFA 2003, Annual Conference Paper No. 119, available at SSRN: http://ssrn.com/ abstract= 302393 [accessed 21 Nov 2012].
  • JEGADEESH, Narasimhan and Sheridan TITMAN (1993),“Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency”, The Journal of Finance, Vol 48(1), 65–91.
  • JOHNSON, Dominic; Rose MCDERMOTT; Emiliy BARRETT; Jonathan COWDEN; Richard WRANGHAM; Mathew MCLNTYRE and Stephen Peter ROSEN (2006),“Overconfidence in War Games: Experimental Evidence on Expectations, Aggression, Gender and Testosterone”. Proceedings of Royal Society Biological Sciences, Vol 273, 2513-2520.
  • KAUSTIA, Markku and Milla PERTTULA (2012),“Overconfidence and Debiasing in the Financial Industry”, Review of Behavioral Finance, Vol 4(1), 46–62.
  • KEIM, Donald (1983),“Size-Related Anomalies and Stock Market Seasonality: Further Empirical Evidence”, Journal of Financial Economics, 12, 13–32, available at http://www.buec.udel.edu/coughenj/finc872_keim_jfe1983.pdf [accessed 22 Mar 2012].
  • LEE, Charles; Andrei SHLEIFER and Richard THALER (1991),“Investor Sentiment and the Closed-End Fund Puzzle”,The Journal of Finance, Vol 46(1), 75–109.
  • MOORE, Don and Paul HEALY (2008),“The Trouble with Overconfidence. Psychological Review, Vol 115(2), 502–517.
  • ODEAN, Terrance (1998),“Volume Volatility, Price, and Profit when All Traders are above Average”, The Journal of Finance, Vol 53(6), 1887–1934.
  • RITTER, Jay (1991),“The Long-Run Performance of Initial Public Offerings”,The Journal of Finance, Vol 46(1), 3–27. .
  • RUSSO, Edward and Paul SCHOEMAKER (1992),“Managing Overconfidence”, Sloan Management Review, Vol33(2), 7–17.
  • SHEFRIN, Hersh and Meir STATMAN (1985),“The Disposition to Sell Winners too Early and Ride Losers too Long: Theory and Evidence”, The Journal of Finance, Vol 40, 777–791.
  • SINGHAL, Atul (2001),“Overconfidence. The Lancet, Vol357(9271), 1879.
  • SKALA, Dorota (2008),“Overconfidence in Psychology and Finance-An Interdisciplinary Literature Review”, Working Paper Bank-I Kredyt No. 4, available at SSRN: http://ssrn.com/abstract=1261907 [accessed 12 Jul 2011].
  • SVENSON, Ola (1981),“Are we all less Risky and More Skillful than our Fellow Drivers? Acta Psychologica, Vol 47(2), 143–148, available at http://heatherlench.com/wp-content/uploads/2008/07/svenson.pdf [accessed 11 Jun 2011].
  • TAYLOR, Shelley and Jonathon BROWN (1988),“Illusion and Well-Being: A Social Psychological Perspective on Mental Health. Psychological Bulletin, Vol 103(2), 193–210.
  • URBIG, Diemo; Julia STAUFC and Utz WEITZEL (2009),“What is Your Level of Overconfidence?A Strictly Incentive Compatible Measurement of Absolute and Relative Overconfidence”, Tjalling C. Koopmans Research Institute Discussion Paper Series No. 09-20, available at http://www.uu.nl/faculty/leg/NL/organisatie/departementen/departementeconomie/onderzoek/publicaties/DiscussionPapers/Documents/09-20.pdf [accessed 18 Feb 2013].
  • WINMAN, Anders; Patrik HANSSON and Peter JUSLIN (2004), Subjective Probability Intervals: how to Cure Overconfidence by Interval Evaluation. Journal of Experimental Psychology: Learning, Memory, and Cognition, Vol 30(6), 1167–1175.
  • ZAKAY, Dan and Yehoshua TSAL (1993), The Impact of Using Forced Decision-Making Strategies on Post Decisional Confidence, Journal of Behavioral Decision Making, Vol 6, 53–68.

-

Year 2014, Volume: 15 Issue: 1, 253 - 268, 25.04.2014

Serkan Şahin , Özlem Yılmaz

Abstract

Son yıllarda finans alanında ilgi gören aşırı öz güven algı sapmasının hem amprik hem de deneysel yaklaşımlarla incelendiği görülmektedir. İkincil veri kullanan ampirik çalışmaların dezavantajı ise aşırı öz güven algı sapmasının piyasalarda doğrudan gözlemlenemiyor olmasıdır. Bu nedenle, amprik çalışmalarda aşırı öz güven algı sapmasını temsil edeceği düşünülen çeşitli değişkenler kullanımakta ancak bu durum yanıltıcı sonuçlar ortaya çıkarabilmektedir. Bu kapsamda, deneysel çalışmaların değişkenlerin kontrol altına alınabildiği laboratuvar ortamında yapılıyor olması nedeniyle, aşırı öz güven algı * This paper is based on Ph.D. thesis of Serkan SAHIN, completed at the Middle East Technical University. * Arş. Gör. Dr., Kahramanmaraş Sütçü İmam Üniversitesi, İİBF, İşletme Bölümü, Kahramanmaraş, serkansans@hotmail.com. ** Prof. Dr., Orta Doğu Teknik Üniversitesi, İİBF, İşletme Bölümü, Ankara, yozlem@metu.edu.tr. sapması doğrudan ortaya konulabilmektedir. Bu çalışmanın amacı İngiltere’deki bireylerin genel ve finansal güven düzeylerini ölçümlemek ve aşırı özgüven sapmasının farklı alanlara bağımlı değişen bir yapısı olup olmadığını belirmektir. Elde edilen bulgular bireylerin genellikle sahip oldukları bilgilere aşırı güven duyduklarını göstermiştir. Çoğu birey kendini diğer katılımcılardan bilgi ve beceri olarak üstün görmekte ve hisse senedi piyaslarında üstün başarı elde edeceklerini düşünmektedirler. Ayrıca elde edilen bulgular bireylerin yatırım bilgisi gerektiren konularda kendilerine daha az güvendiğini ortaya koymaktadır.

Keywords

Davranışsal Finans Deneysel Finans ve Aşırı Özgüven Algı Sapması

References

  • ABREU, Margarida and Victor MENDES (2012), Information, Overconfidence and Trading: Do the Sources of Information Matter? Journal of Economic Psychology, Vol 33(4), 868–881.
  • AKINTOYE, Ishola Rufus (2008),“Efficient Market Hypothesis and Behavioral Finance: A Review of Literature”, European Journal of Social Sciences, Vol7(2), 7–17.
  • ALICKE, Mark; M.L.KLOTZ; David BREITENBECHER; Tiricia YURAK and Debbie VREDENBURG (1995), Personal Contact, Individuation and the Better-Than-Average Effect. Journal of Personality and Social Psychology, Vol 68(5), 804–825.
  • ALLEN, David and Dorla EVANS (2005),“Bidding and Overconfidence in Experimental Financial Markets”,The Journal of Behavioral Finance, Vol 6(3), 108–120.
  • BANZ, Rolf (1981),“The Relationship Between Return and Market Value of Common Stock. Journal of Financial Economics”, Vol 9(1), 3–18.
  • BARBERIS, Nicholas; Ming HUANG and Tano SANTOS (2001),“Prospect Theory and Asset Prices”, Quarterly Journal of Economics, Vol 116(1), 1–53.
  • BAR-TAL,Yoram; Anat SARID and Liat KISHON-RABIN (2001),“A Test of the Overconfidence Phenomenon Using Audio Signals”, Journal of General Psychology, Vol 128(1), 76–80.
  • BASU, Susanto (1977),“Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis”,The Journal of Finance, Vol 32(3), 663-682.
  • BERNARD, Victor and Jacob THOMAS (1989),“Post-Earnings-Announcement Drift: Delayed Price Response or Risk Premium?”, Journal of Accounting Research, Vol27 (Supplement), 1–36.
  • BIAIS, Buruno; Denis HILTON; Karine MAZURIER and Sébastien POUGET, (2005), “Judgmental Overconfidence, Self-Monitoring, and Trading Performance in an Experimental Financial Market”, The Review of Economic Studies, Vol 72(251), 287–312.
  • BOSSAERTS, Peter (2000),“Experiments with Financial Markets: Implications for Asset Pricing Theory”, Working Paper, available at http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.26.902&rep=rep1&type=pdf [accessed 24 Feb 2013].
  • CAMERER, Colin and Dan LOVALLO (1999),“Overconfidence and Excess Entry: An Experimental Approach”, American Economic Review, Vol 89(1), 306–318.
  • CHRISTENSEN-SZALANSKI, Jay and James BUSHYHEAD (1981),“Physicians' Use of Probabilistic Information in a Real Clinical Setting”, Journal of Experimental Psychology: Human Perception and Performance, Vol 7(4), 928–935.
  • CLAYSON, Dennis. (2005),“Performance Overconfidence: Metacognitive Effects or Misplaced Student Expectations?”, Journal of Marketing Education, Vol 27(2), 122–129.
  • DEAVES, Richard; Eric LÜDERS and Guo Ying LUO (2009),“An Experimental Test of the Impact of Overconfidence and Gender on Trading Activity”, Review of Finance, .Vol 13(3), 555–575.
  • DEBONDT, Wernerand RichardTHALER (1985), Does the Stock Market Overreact”, The Journal of Finance, Vol 40(3), 793–805.
  • FISCHHOFF, Baruch; Paul SLOVIC and Sarah LICHTENSTEIN (1977),“Knowing with Certainty: The Appropriateness of Extreme Confidence”, Journal of Experimental Psychology, Vol 3(4), 552–564.
  • FRENCH, Keneth (1980),”Stock Returns and the Weekend Effect. Journal of Financial Economics, Vol 8(1), 55–70, available at http://cdn.transtutors. com/UploadAssignments/324194_2_Stock-Returnsand-weekendeffect.pdf [accessed 27 Nov 2012].
  • GREENBERG, Joel (1986),“The “White Overalls” of Overconfidence. Science News”, Vol 129(19), 293.
  • HILTON, Denis; Isabelle RÉGNER; Laure CABANTOUS; Laetitia CHARALAMBIDES and Stéphane VAUTIER (2011),“Do Positive Illusions Predict Overconfidence in Judgment? A Test Using Interval Production and Probability Evaluation Measures of Miscalibration”, Journal of Behavioral Decision Making, Vol 24(2), 117–139.
  • HIROTA, Shin'ichi and Shyam SUNDER (2006),“Price Bubbles Sans Dividend Anchors: Evidence from Laboratory Stock Markets”, Yale ICF Working Paper No. 02-42 EFA 2003, Annual Conference Paper No. 119, available at SSRN: http://ssrn.com/ abstract= 302393 [accessed 21 Nov 2012].
  • JEGADEESH, Narasimhan and Sheridan TITMAN (1993),“Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency”, The Journal of Finance, Vol 48(1), 65–91.
  • JOHNSON, Dominic; Rose MCDERMOTT; Emiliy BARRETT; Jonathan COWDEN; Richard WRANGHAM; Mathew MCLNTYRE and Stephen Peter ROSEN (2006),“Overconfidence in War Games: Experimental Evidence on Expectations, Aggression, Gender and Testosterone”. Proceedings of Royal Society Biological Sciences, Vol 273, 2513-2520.
  • KAUSTIA, Markku and Milla PERTTULA (2012),“Overconfidence and Debiasing in the Financial Industry”, Review of Behavioral Finance, Vol 4(1), 46–62.
  • KEIM, Donald (1983),“Size-Related Anomalies and Stock Market Seasonality: Further Empirical Evidence”, Journal of Financial Economics, 12, 13–32, available at http://www.buec.udel.edu/coughenj/finc872_keim_jfe1983.pdf [accessed 22 Mar 2012].
  • LEE, Charles; Andrei SHLEIFER and Richard THALER (1991),“Investor Sentiment and the Closed-End Fund Puzzle”,The Journal of Finance, Vol 46(1), 75–109.
  • MOORE, Don and Paul HEALY (2008),“The Trouble with Overconfidence. Psychological Review, Vol 115(2), 502–517.
  • ODEAN, Terrance (1998),“Volume Volatility, Price, and Profit when All Traders are above Average”, The Journal of Finance, Vol 53(6), 1887–1934.
  • RITTER, Jay (1991),“The Long-Run Performance of Initial Public Offerings”,The Journal of Finance, Vol 46(1), 3–27. .
  • RUSSO, Edward and Paul SCHOEMAKER (1992),“Managing Overconfidence”, Sloan Management Review, Vol33(2), 7–17.
  • SHEFRIN, Hersh and Meir STATMAN (1985),“The Disposition to Sell Winners too Early and Ride Losers too Long: Theory and Evidence”, The Journal of Finance, Vol 40, 777–791.
  • SINGHAL, Atul (2001),“Overconfidence. The Lancet, Vol357(9271), 1879.
  • SKALA, Dorota (2008),“Overconfidence in Psychology and Finance-An Interdisciplinary Literature Review”, Working Paper Bank-I Kredyt No. 4, available at SSRN: http://ssrn.com/abstract=1261907 [accessed 12 Jul 2011].
  • SVENSON, Ola (1981),“Are we all less Risky and More Skillful than our Fellow Drivers? Acta Psychologica, Vol 47(2), 143–148, available at http://heatherlench.com/wp-content/uploads/2008/07/svenson.pdf [accessed 11 Jun 2011].
  • TAYLOR, Shelley and Jonathon BROWN (1988),“Illusion and Well-Being: A Social Psychological Perspective on Mental Health. Psychological Bulletin, Vol 103(2), 193–210.
  • URBIG, Diemo; Julia STAUFC and Utz WEITZEL (2009),“What is Your Level of Overconfidence?A Strictly Incentive Compatible Measurement of Absolute and Relative Overconfidence”, Tjalling C. Koopmans Research Institute Discussion Paper Series No. 09-20, available at http://www.uu.nl/faculty/leg/NL/organisatie/departementen/departementeconomie/onderzoek/publicaties/DiscussionPapers/Documents/09-20.pdf [accessed 18 Feb 2013].
  • WINMAN, Anders; Patrik HANSSON and Peter JUSLIN (2004), Subjective Probability Intervals: how to Cure Overconfidence by Interval Evaluation. Journal of Experimental Psychology: Learning, Memory, and Cognition, Vol 30(6), 1167–1175.
  • ZAKAY, Dan and Yehoshua TSAL (1993), The Impact of Using Forced Decision-Making Strategies on Post Decisional Confidence, Journal of Behavioral Decision Making, Vol 6, 53–68.
There are 38 citations in total.

Details

Primary Language English
Journal Section Makaleler
Authors

Serkan Şahin

Özlem Yılmaz

Publication Date April 25, 2014
Submission Date October 1, 2013
Published in Issue Year 2014 Volume: 15 Issue: 1

Cite

APA Şahin, S., & Yılmaz, Ö. (2014). Overconfidence in Fınance wıth Different Domains: An Interdisciplinary Experimental Approach. Cumhuriyet Üniversitesi İktisadi Ve İdari Bilimler Dergisi, 15(1), 253-268.
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