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A short-but-efficient test for overconfidence and prospect theory. Experimental validation

Author

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  • Peon, David
  • Calvo, Anxo
  • Antelo, Manel

Abstract

Two relevant areas in the behaviorist literature are prospect theory and overconfidence. Many tests are available to elicit their different manifestations: utility curvature, probability weighting and loss aversion in PT; overestimation, overplacement and overprecision as measures of overconfidence. Those tests are suitable to deal with single manifestations but often unfeasible, in terms of time to be performed, to determine a complete psychological profile of a given respondent. This paper contributes to provide two short tests, based on classic works in the literature, to derive a complete profile on prospect theory and overconfidence. We conduct an experimental research with 126 students to validate the tests, revealing they are broadly efficient to replicate the regular results in the literature. The experimental analysis of all measures of overconfidence and prospect theory using the same sample of respondents allows us to provide new insights on the relationship between these two areas. Finally, enhancements for future research are suggested.

Suggested Citation

  • Peon, David & Calvo, Anxo & Antelo, Manel, 2014. "A short-but-efficient test for overconfidence and prospect theory. Experimental validation," MPRA Paper 54135, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:54135
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    References listed on IDEAS

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    1. Cafferata, Fernando G. & Domínguez, Patricio & Scartascini, Carlos, 2023. "Overconfidence and Gun Preferences: How Behavioral Biases Affect Your Safety," IDB Publications (Working Papers) 12816, Inter-American Development Bank.

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    More about this item

    Keywords

    Experimental economics; overconfidence; prospect theory; behavioral finance; utility measurement; overestimation; overplacement; overprecision;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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