OVERCONFIDENCE BIAS AND ITS EFFECTS ON PORTFOLIO DECISIONs

2017

The purpose of this study is to investigate the influence of behavioral biases, overconfidence and loss aversion on the decision making behavior of individual equity investor by considering the risk perception as mediator. The results of the study are helpful for policy makers, financial advisors, equity investors, finance teachers, and finance students. The individual equity investor knows which bias is interrupting his decision making process, and who is reducing these biases and making their decision making level stronger. Data was collected through convenient sampling using questionnaires. The respondents were the investors of Islamabad stock exchange, brokerage houses and bankers. 250 questionnaires were distributed of which 160 were returned, making the response rate approximately 64% percent. The result indicated that investors are affected by overconfidence and loss aversion bias. Both biases have a significant impact.

International Journal of Business and Management, 2011

The main objective of the research is to examine the excessive trading hypothesis, investors who have higher overconfidence shown by high miscalibration levels will tend to practice aggresive and excessive trading strategy. It is an experimental research which combines both between and within subject design. The participants are undergraduate students who have already taken financial management course but have not yet invest in real capital market. The result of the research shows that high overconfidence investors have higher trading activity than low overconfidence investor. The other result shows that among high overconfidence investors, there is no trading activity differences between pre and post bad news, whereas among low overconfidence investors, the existence of bad news cause trading activity to decrease in the post bad news period. Then, the investment returns of high overconfidence investors is significantly lower than that of the low overconfidence investors.

The European Journal of Finance, 2005

We experimentally test overconfidence in investment decisions by offering participants the possibility to substitute their own for alternative investment choices. Overall, 149 subjects participated in two experiments, one with just one risky asset, the other with two risky assets. Overconfidence increases (i) with the absolute deviation from optimal choices, (ii) with task complexity, and (iii) decreases with uncertainty as indicated by the difference between willingness to pay and to accept. JEL Classification: C91, D81, G11.

Borneo Journal of Social Science & Humanities, 2024

Passive investing has surpassed active investing, representing over 50% of global assets under management (AUM) for the first time since its inception five decades ago. From behavioral finance perspective, moving from active to passive is a shift beyond arithmetic and logic. Both styles require behavioral alignment on individual investors, failing which there will be no basis of confidence to hold such investment over time. A comparative study was made between active and passive investors in the context of overconfidence bias, i.e., the most popular behavioral bias studied among retail investors. Given the enduring nature of human overconfidence, the study explored whether passive investors exhibit similar level of bias as their active counterparts. Additionally, a nature and-nurture model incorporating investor’s personality and personal experience were included as antecedents to enrich understanding on its effect toward overconfidence. For the purpose of this study, a questionnaire survey was conducted among Malaysian investors surrounding the Covid-19 pandemic in early 2020. Data on three hundred and fifty retail investors were garnered with self-report on personality, personal experience, overconfidence and investing style. On the instruments, we employed Gray’s neuropsychological perspective of personality in the expression of behavioral inhibition and activation systems (BIS/BAS). Overconfidence was analyzed in three forms, i.e., better-than-average (BTA), illusion-of-control (IOC), and volatility estimate (VOLEST). The result showed that overconfidence bias is observed among active and passive investors. Additionally, investors with higher BIS inversely predict IOC which in turn lead to adoption of passive investing. Winning experiences positively affect IOC which in turn lead to active investing. The last section discussed the implication of overconfidence in passive investing and the role of personality and personal experience in eliciting client’s risk profile.

International Journal of Behavioural Accounting and Finance, 2015

This study attempts to group investors (individuals and professionals) into different segments based on their level of overconfidence (as a psychological bias) and, then, to examine whether, and to what extent, specific personality trait drive investors' trading behaviour. This study performing a cluster analysis, and using a representative survey of 345 investors in Greece, identified two main segments of investors: Overconfident investors and Underconfident investors. A comparative analysis between these two segments identified some differences in the trading behaviour of investors, depending on the segment they belong to. Moreover, a statistical association between investors' clusters and various demographic, socioeconomic characteristics and trading behaviour is also found.

Applying a standard questionnaire to a sample of 44 professional investors, we sought for explicit correlations between selected biological characteristics of the investors and the cognitive bias known as overconfidence. We found that both male and female investors showed overconfidence above the subjective probability of 0.7 and underconfidence below this threshold. But the sexes seemed to behave differently when they were totally uncertain of their answers. Experienced and inexperienced investors were overconfident whenever they were 70 percent (or above) confident of their answers. Despite that, experienced investors were relatively more calibrated. Of those who were highly uncertain of their answers, the inexperienced showed less confidence. Moreover, a logistic regression analysis showed that male subjects, fathers, right-handers, and subjects with a university degree and less than five years of experience in stock markets were more prone to the overconfidence effect.

Zenodo (CERN European Organization for Nuclear Research), 2023

This study aims to analyze the impact of Overconfidence Bias, Representativeness Bias, and Herding towards investment decision making through Risk Tolerance, where psychological and social factors could have effect on the investors' decision making process. The sample was gathered using Snowball Sampling technique on 200 stock investors who have made transactions in the Indonesian Stock Exchange. The data was analyzed using SEM PLS with Smart PLS 3.2.9 application. The result shows that Overconfidence Bias and Representativeness Bias have significant impact on both direct and indirect investment decision making process through Risk Tolerance. On the other hand, Herding shows no effect on direct and indirect investment decision making process through Risk Tolerance.

The Journal of Socio-Economics, 2010

This paper explores systematic distortions of subjective probabilities by overconfident investors. In agreement with many non-expected utility theories, our devised setup acknowledges nonlinear weighting of physical probabilities by both rational and overconfident investors. Overconfidence -assumed to be higher after a history of gains and lower after a history of losses -changes these probability transformations. Using US asset price data, overconfident investors are found to be more optimistic than rational investors about future prospects.

2020