Journal
JOURNAL OF CORPORATE FINANCE
Volume 43, Issue -, Pages 175-192Publisher
ELSEVIER
DOI: 10.1016/j.jcorpfin.2017.01.002
Keywords
Overconfidence; Better-than-average; Bias; Investment; Risk aversion; Professionals
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Funding
- CentER Fund for Experimental Research
- AXA foundation
- Inquire Europe
- Swiss National Science Foundation [PP00P1_128574, PP00P1_150739]
- Swiss National Science Foundation (SNF) [PP00P1_128574, PP00P1_150739] Funding Source: Swiss National Science Foundation (SNF)
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A positive relation between overconfidence and investment provision has been theoretically justified and practically assumed in the literature, but has not been thoroughly investigated. We test and confirm this positive relation between direct measures of overconfidence in one's financial knowledge and choice of investment. More precisely, strong overconfidence results in excess investment, underconfidence induces underinvestment, whereas moderate overconfidence leads to accurate investments. Our experimental results are based on different subject pools, financial professionals and students, and different media: computer-, paper-, and web-based. The degree of one's overestimation of one's individual financial knowledge relative to one's actual knowledge as well as relative to the knowledge of peers explains investment decisions better than one's actual knowledge. The relation between overconfidence and investment is robust to the degree of individual risk aversion, the riskiness of the investment projects, and to the changes in incentives structure. (C) 2017 Published by Elsevier B.V.
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