Ambiguity and Overconfidence

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

Menachem Brenner

New York University (NYU) - Department of Finance

Yehuda (Yud) Izhakian

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

Orly Sade

Hebrew University of Jerusalem - Department of Finance

Multiple version iconThere 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

Brenner, Menachem and Izhakian, Yehuda (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

Menachem Brenner

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0323 (Phone)
212-995-4233 (Fax)

Yehuda (Yud) Izhakian (Contact Author)

City University of New York, CUNY Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

HOME PAGE: http://people.stern.nyu.edu/yizhakia/

Orly Sade

Hebrew University of Jerusalem - Department of Finance ( email )

Mount Scopus
Jerusalem, 91905
Israel
972 2 588 3227 (Phone)

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