The Coherence and Consistency of Investors' Probability Judgments

Management Science, Vol. 53, No. 11, pp. 1731-1744, November 2007

Posted: 22 Feb 2007 Last revised: 16 Dec 2007

See all articles by David V. Budescu

David V. Budescu

Fordham University - Fordham College at Rose Hill

Ning Du

DePaul University - School of Accountancy and MIS

Abstract

This study investigates the quality of direct probability judgments and quantile estimates with a focus on calibration and consistency. The two response modes use different measures of miscalibration so it is difficult to compare directly their relative (in)accuracy. We employed a more refined within-subject design in which DMs used both response modes to make judgments about a random sample of stocks accompanied by identical information to facilitate comparison between the two judgment methods. DMs judged the probabilities that the stocks will reach a certain threshold, provided lower and upper bounds of these forecasts, and estimated median, 50%, 70% and 90% confidence intervals of their future prices. We found that the judgments were internally consistent and coherent but, in most cases, they were slightly miscalibrated. We used several new methods of analysis that allow for more precise and reliable comparison between the two response modes. We inferred point probability estimates for the target events from the confidence intervals and analyzed them by the same methods applied to binary judgments. Interestingly, when we quantified miscalibration in identical fashion for both methods we did not find evidence of differential levels of miscalibration for the probability judgments and the confidence intervals. We discuss the theoretical and practical implications of these results.

Keywords: Overconfidence, Calibration, Confidence Intervals, Probability Judgments, Response Modes, Investment Decision, Forecasts

JEL Classification: D81, D84, D91, G10, G30, M40

Suggested Citation

Budescu, David V. and Du, Ning, The Coherence and Consistency of Investors' Probability Judgments. Management Science, Vol. 53, No. 11, pp. 1731-1744, November 2007, Available at SSRN: https://ssrn.com/abstract=964031

David V. Budescu

Fordham University - Fordham College at Rose Hill ( email )

United States

Ning Du (Contact Author)

DePaul University - School of Accountancy and MIS ( email )

1 E. Jackson Blvd
Chicago, IL 60607
United States
312-362-8308 (Phone)

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