Overconfidence in Psychology and Finance - An Interdisciplinary Literature Review
Bank i Kredyt, No. 4, pp. 33-50, 2008
18 Pages Posted: 1 Sep 2008
Date Written: September 1, 2008
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: Suggested Citation