Effects of Overconfidence on Asset Holdings among Older Adults

52 Pages Posted: 24 Sep 2018 Last revised: 21 Feb 2019

See all articles by Su Hyun Shin

Su Hyun Shin

University of Alabama

Andrew Hanks

The Ohio State University

Date Written: September 21, 2018

Abstract

Research in psychology shows that people miscalibrate their ability and often incorrectly perceive themselves as above (overconfident) or below average. Previous measures that proxy for overconfidence focus on perceptions about knowledge pertaining to economic conditions and financial markets since the researchers usually study economic and financial decisions. Our objective is to contribute to this literature by considering a more general proxy of overconfidence. We do so by operationalizing measures of subjective and objective cognitive ability in the Health and Retirement Study to estimate a proxy for overconfidence. This proxy is the residual variation of subjective cognition unexplained by an objective cognitive score and covariates. We find that higher overconfidence leads to a lower chance of an individual having financial assets in nearly all accounts, such as cash-equivalent, stocks, CDs, and savings in various retirement accounts including defined benefits, defined contribution, and individual retirement accounts. Moreover, conditional on ownership, higher confidence leads to a decrease in financial holdings in cash-equivalent assets and thus in total financial assets. Conditional on ownership, more overconfidence leads to an increase in the share of wealth held in less actively managed accounts, such as cash-equivalent, CDs, DB, and other financial assets.

Keywords: overconfidence, asset holdings, investment, cognitive ability

JEL Classification: D9, D12, D14

Suggested Citation

Shin, Su Hyun and Hanks, Andrew, Effects of Overconfidence on Asset Holdings among Older Adults (September 21, 2018). 2019 Academic Research Colloquium for Financial Planning and Related Disciplines. Available at SSRN: https://ssrn.com/abstract=3253215 or http://dx.doi.org/10.2139/ssrn.3253215

Su Hyun Shin (Contact Author)

University of Alabama ( email )

Tuscaloosa, AL 35487-0158
United States

Andrew Hanks

The Ohio State University ( email )

130A Campbell Hall
1787 Neil Ave.
Columbus, OH OH 43210
United States

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