Ambiguity and Overconfidence
49 Pages Posted: 2 Mar 2011 Last revised: 1 Aug 2015
Date Written: February 24, 2015
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