Overconfidence

BEHAVIORAL FINANCE: INVESTORS, CORPORATIONS, AND MARKETS, pp. 241-258, H. K. Baker and J. Nofsinger, eds., John Wiley & Sons, Inc., 2010

Posted: 28 May 2011

See all articles by Markus Glaser

Markus Glaser

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: October 1, 2010

Abstract

Overconfidence is the most prevalent judgment bias. Several studies find that overconfidence can lead to suboptimal decisions on the part of investors, managers, or politicians. This chapter explains which effects are usually summarized as overconfidence, shows how to measure these effects, and discusses several factors affecting the degree of overconfidence of people. Furthermore, the chapter explains how overconfidence is modeled in finance and that the main assumptions, which assume that investors are miscalibrated by underestimating stock variances or by overestimating the precision of their knowledge, are a reasonable modeling assumption. Applications of overconfidence in the theoretical and empirical finance literature are also described.

Keywords: miscalibration, better-than-average effect

JEL Classification: D8, G1

Suggested Citation

Glaser, Markus and Weber, Martin, Overconfidence (October 1, 2010). BEHAVIORAL FINANCE: INVESTORS, CORPORATIONS, AND MARKETS, pp. 241-258, H. K. Baker and J. Nofsinger, eds., John Wiley & Sons, Inc., 2010, Available at SSRN: https://ssrn.com/abstract=1852590

Markus Glaser (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Schackstraße 4
Munich, 80539
Germany

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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