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An Experimental Study of Overconfidence in Accounting Numbers Predictions

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  • Sasson Bar-Yosef
  • Itzhak Venezia

Abstract

This paper analyzes experimentally investors' overconfidence when making predictions of financial and accounting numbers and explores which factors drive this bias. In particular we analyze the extent to which familiarity with the variable predicted, the complexity of the forecasting task, and the amount of information available for the investors affect their overconfidence. We also compare the extent to which professional analysts differ from other investors in that respect. For this we conducted three experiments. Two experiments with advanced accounting students as subjects, where the experiments differed in the firm the subjects analyzed and the third with professional financial analysts. In each experiment we provided the subjects with past accounting reports and other financial data of a firm. Based on these data the subjects were asked to forecast Net Income, EPS, and Share Price. In all the experiments we found that the subjects exhibited a considerable degree of overconfidence. The professional analysts were slightly more overconfident than the students. Subjects showed more overconfidence in predicting share prices than when forecasting other lesser familiar variables. However we could not detect correlation between the amount of information and overconfidence, neither between success and overconfidence, nor between the complexity of the task and overconfidence.

Suggested Citation

  • Sasson Bar-Yosef & Itzhak Venezia, 2014. "An Experimental Study of Overconfidence in Accounting Numbers Predictions," International Journal of Economic Sciences, Prague University of Economics and Business, vol. 2014(1), pages 78-89.
  • Handle: RePEc:prg:jnljes:v:2014:y:2014:i:1:id:9:p:78-89
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    References listed on IDEAS

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    1. Huberman, Gur, 2001. "Familiarity Breeds Investment," The Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-680.
    2. Cooper, Arnold C. & Woo, Carolyn Y. & Dunkelberg, William C., 1988. "Entrepreneurs' perceived chances for success," Journal of Business Venturing, Elsevier, vol. 3(2), pages 97-108.
    3. Bar-Yosef, Sasson & Venezia, Itzhak, 2004. "Experimental study of implications of SFAS 131: The effects of the new standard on the informativeness of segment reporting," Discussion Papers 2004/13, Free University Berlin, School of Business & Economics.
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    Cited by:

    1. Itzhak Venezia, 2018. "Lecture Notes in Behavioral Finance," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 10751, August.
    2. Tatiana Fedyk & Zvi Singer & Theodore Sougiannis, 2020. "The Accrual Anomaly: Accrual Originations, Accrual Reversals, and Resolution of Uncertainty," Contemporary Accounting Research, John Wiley & Sons, vol. 37(2), pages 885-916, June.
    3. Markus Spiwoks & Kilian Bizer, 2018. "On the Measurement of Overconfidence: An Experimental Study," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 4(1), pages 30-37, 01-2018.

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    More about this item

    Keywords

    Accounting; Prediction of Accounting Numbers; Experimental Economics; Overconfidence; Behavioral Finance; Analysts;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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