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Properties of expectation biases: Optimism and overconfidence

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  • Kinari, Yusuke

Abstract

This study examines the properties of expectation biases using 14 sets of panel surveys that required participants to forecast the NIKKEI 225 over three forecasting horizons: one-day, one-week, and one-month. Constructing proxies for optimism and overconfidence as the expectation biases, this study shows that participants, on average, had pessimistic beliefs for the one-day and optimistic beliefs for one-week and one-month horizons, while they had overconfident beliefs for all three horizons. It also shows that participants tended to become more optimistic and overconfident at longer horizons. Moreover, the degree of optimism or pessimism varied considerably across samples taken at different times, while overconfidence remained stable. Furthermore, this study finds a negative correlation between optimism and the return on the NIKKEI 225, demonstrating that participants became optimistic when the NIKKEI 225 decreased. A negative correlation would be expected if people formed expectations following a random walk; however, this study rejects this hypothesis.

Suggested Citation

  • Kinari, Yusuke, 2016. "Properties of expectation biases: Optimism and overconfidence," Journal of Behavioral and Experimental Finance, Elsevier, vol. 10(C), pages 32-49.
    • Handle: RePEc:eee:beexfi:v:10:y:2016:i:c:p:32-49
    DOI: 10.1016/j.jbef.2016.02.003
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    Cited by:

    1. Gurdgiev, Constantin & Ni, Qiuxin, 2023. "Board diversity: Moderating effects of CEO overconfidence on firm financing decisions," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    2. Kawamura, Tetsuya & Mori, Tomoharu & Motonishi, Taizo & Ogawa, Kazuhito, 2021. "Is Financial Literacy Dangerous? Financial Literacy, Behavioral Factors, and Financial Choices of Households," Journal of the Japanese and International Economies, Elsevier, vol. 60(C).
    3. Víctor Alberto Pena & Alina Gómez-Mejía, 2019. "Effect of the anchoring and adjustment heuristic and optimism bias in stock market forecasts," Revista Finanzas y Politica Economica, Universidad Católica de Colombia, vol. 11(2), pages 389-409, November.
    4. Chhatwani, Malvika & Mishra, Sushanta Kumar, 2021. "Financial fragility and financial optimism linkage during COVID-19: Does financial literacy matter?," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 94(C).

    More about this item

    Keywords

    Overconfidence; Optimism; Expectation; Stock price forecast; Status quo bias; Random walk;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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