Ambiguity and Overconfidence

Brenner, Menachem; Izhakian, Yud; Sade, Orly

doi:10.2139/ssrn.1773663

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Ambiguity and Overconfidence

49 Pages Posted: 2 Mar 2011 Last revised: 1 Aug 2015

See all articles by Menachem Brenner

Menachem Brenner

New York University (NYU) - Department of Finance

Yud Izhakian

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance; Baruch College, City University of New York

Orly Sade

Hebrew University of Jerusalem - Department of Finance

There are 2 versions of this paper

Date Written: February 24, 2015

Abstract

There are two phenomena in behavioral finance and economics which are seemingly unrelated and have been studied separately; overconfidence and ambiguity aversion. In this paper we are trying to link these two phenomena providing a theoretical foundation supported by evidence from an experimental study. We derive a model, based on the max-min ambiguity framework that links overconfidence to ambiguity aversion. In the experimental study we find that overconfidence is decreasing in ambiguity, as predicted by our model.

Keywords: Ambiguity Aversion, Familiarity, Overconfidence

JEL Classification: C65, D81, D83

Suggested Citation: Suggested Citation

Brenner, Menachem and Izhakian, Yud and Sade, Orly, Ambiguity and Overconfidence (February 24, 2015). Available at SSRN: https://ssrn.com/abstract=1773663 or http://dx.doi.org/10.2139/ssrn.1773663