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

Ulm University - Department of Mathematics and Economics

Werner Güth

Max Planck Institute for Research on Collective Goods; Luiss Guido Carli University

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). Available at SSRN: https://ssrn.com/abstract=296121 or http://dx.doi.org/10.2139/ssrn.296121

Gerlinde Fellner-Röhling

Ulm University - Department of Mathematics and Economics ( email )

Helmholzstrasse
Ulm, D-89081
Germany

Werner Güth (Contact Author)

Max Planck Institute for Research on Collective Goods

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Luiss Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

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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