Overconfidence in Psychology and Finance - An Interdisciplinary Literature Review

Bank i Kredyt, No. 4, pp. 33-50, 2008

18 Pages Posted: 1 Sep 2008

See all articles by Dorota Skala

Dorota Skala

Institute of Economics and Finance, University of Szczecin

Date Written: September 1, 2008

Abstract

This paper reviews the literature on one of the most meaningful concepts in modern behavioural finance, the overconfidence phenomenon. Overconfidence is presented as a well-developed psychological theory, with main facets comprising miscalibration, better-than-average effect, illusion of control and unrealistic optimism. The primary applications of overconfidence in contemporary finance are analysed, from the perspective of financial markets and corporate behaviour. Experimental studies, formal models and analyses of market data demonstrate that overconfidence at least partially solves some financial market puzzles that cannot be accounted for by standard economic theory. Overconfidence in the corporate context may affect not only a company's internal financing structure, but also its interactions with other market participants through merger and acquisition activity.

Keywords: overconfidence, behavioral finance, investor psychology, financial markets, corporate policies, overconfident investors

JEL Classification: D8, G1, G32, G34

Suggested Citation

Skala, Dorota, Overconfidence in Psychology and Finance - An Interdisciplinary Literature Review (September 1, 2008). Bank i Kredyt, No. 4, pp. 33-50, 2008, Available at SSRN: https://ssrn.com/abstract=1261907

Dorota Skala (Contact Author)

Institute of Economics and Finance, University of Szczecin ( email )

ul. Mickiewicza 64
Szczecin, Zachodniopomorskie PL-71-101
Poland

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
5,893
Abstract Views
16,622
Rank
2,512
PlumX Metrics