Illusion of Expertise in Portfolio Decisions: An Experimental Approach

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