Illusion of Expertise in Portfolio Decisions: An Experimental Approach

27 Pages Posted: 16 Jan 2002

See all articles by Gerlinde Fellner-Röhling

Gerlinde Fellner-Röhling

University of Ulm - Department of Mathematics and Economics

Werner Guth

Max Planck Institute of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Boris Maciejovsky

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Economics

Date Written: December 2001

Abstract

Overall, 72 subjects invest their endowment in four risky assets. Each combination of assets yields the same expected return and variance of returns. Illusion of expertise prevails when one prefers nevertheless the self-selected portfolio. After being randomly assigned to groups of four, subjects are asked to elect their "expert" based on responses to a prior decision task. Using the random price mechanism reveals that 64% of the subjects prefer their own portfolio over the average group portfolio or the expert's portfolio. Illusion of expertise is shown to be stable individually, over alternatives, and for both eliciting methods, willingness to pay and to accept.

Keywords: Investment Decisions, Portfolio Selection, Overconfidence, Unrealistic Optimism, Illusion of Control, Endowment Effect

JEL Classification: C91, D80, D84, G11

Suggested Citation

Fellner-Röhling, Gerlinde and Güth, Werner and Maciejovsky, Boris, Illusion of Expertise in Portfolio Decisions: An Experimental Approach (December 2001). CESifo Working Paper Series No. 621. Available at SSRN: https://ssrn.com/abstract=296121

Gerlinde Fellner-Röhling

University of Ulm - Department of Mathematics and Economics ( email )

Helmholzstrasse
Ulm, D-89081
Germany

Werner Güth (Contact Author)

Max Planck Institute of Economics ( email )

Kahlaische Strasse 10
D-07745 Jena, 07745
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Boris Maciejovsky

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Economics ( email )

Kahlaische Strasse 10
D-07745 Jena, 07745
Germany
+49 3641 686626 (Phone)
+49 3641 686623 (Fax)

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