Overconfidence in Psychology and Finance - An Interdisciplinary Literature Review

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

18 Pages Posted: 1 Sep 2008  

Dorota Skala

University of Szczecin - Faculty of Economics and Management

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)

University of Szczecin - Faculty of Economics and Management ( email )

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

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