IDEAS home Printed from https://ideas.repec.org/p/tiu/tiutis/940a1d28-f38f-4953-9790-55229b401b86.html
   My bibliography  Save this paper

Overconfidence and investment : An experimental approach

Author

Listed:
  • Pikulina, E.S.

    (Tilburg University, School of Economics and Management)

  • Renneboog, Luc

    (Tilburg University, School of Economics and Management)

  • Tobler, P.N.

    (Tilburg University, School of Economics and Management)

Abstract

A positive relation between overconfidence and investment provision has been theoretically justified and practically assumed in the literature, but has not been thoroughly investigated. We test and confirm this positive relation between direct measures of overconfidence in one's financial knowledge and choice of investment. More precisely, strong overconfidence results in excess investment, underconfidence induces underinvestment, whereas moderate overconfidence leads to accurate investments. Our experimental results are based on different subject pools, financial professionals and students, and different media: computer-, paper-, and web-based. The degree of one's overestimation of one's individual financial knowledge relative to one's actual knowledge as well as relative to the knowledge of peers explains investment decisions better than one's actual knowledge. The relation between overconfidence and investment is robust to the degree of individual risk aversion, the riskiness of the investment projects, and to the changes in incentives structure.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Pikulina, E.S. & Renneboog, Luc & Tobler, P.N., 2017. "Overconfidence and investment : An experimental approach," Other publications TiSEM 940a1d28-f38f-4953-9790-5, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:940a1d28-f38f-4953-9790-55229b401b86
    as

    Download full text from publisher

    File URL: https://pure.uvt.nl/ws/portalfiles/portal/77259027/1-s2.0-S0929119917300032-main.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Gilles Hilary & Lior Menzly, 2006. "Does Past Success Lead Analysts to Become Overconfident?," Management Science, INFORMS, vol. 52(4), pages 489-500, April.
    2. Ulrike Malmendier & Geoffrey Tate, 2005. "CEO Overconfidence and Corporate Investment," Journal of Finance, American Finance Association, vol. 60(6), pages 2661-2700, December.
    3. John Horton & David Rand & Richard Zeckhauser, 2011. "The online laboratory: conducting experiments in a real labor market," Experimental Economics, Springer;Economic Science Association, vol. 14(3), pages 399-425, September.
    4. van Rooij, Maarten & Lusardi, Annamaria & Alessie, Rob, 2011. "Financial literacy and stock market participation," Journal of Financial Economics, Elsevier, vol. 101(2), pages 449-472, August.
    5. Markus Glaser & Thomas Langer & Martin Weber, 2007. "On the Trend Recognition and Forecasting Ability of Professional Traders," Decision Analysis, INFORMS, vol. 4(4), pages 176-193, December.
    6. John Y. Campbell, 2006. "Household Finance," Journal of Finance, American Finance Association, vol. 61(4), pages 1553-1604, August.
    7. Duersch, Peter & Oechssler, Jörg & Schipper, Burkhard C., 2009. "Incentives for subjects in internet experiments," Economics Letters, Elsevier, vol. 105(1), pages 120-122, October.
    8. Lusardi, Annamaria & Tufano, Peter, 2015. "Debt literacy, financial experiences, and overindebtedness," Journal of Pension Economics and Finance, Cambridge University Press, vol. 14(4), pages 332-368, October.
    9. Itzhak Ben-David & John R. Graham, 2013. "Managerial Miscalibration," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(4), pages 1547-1584.
    10. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
    11. Chesney, Thomas & Chuah, Swee-Hoon & Hoffmann, Robert, 2009. "Virtual world experimentation: An exploratory study," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 618-635, October.
    12. Annamaria Lusardi & Olivia S. Mitchell, 2014. "The Economic Importance of Financial Literacy: Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 5-44, March.
    13. Malmendier, Ulrike & Tate, Geoffrey, 2008. "Who makes acquisitions? CEO overconfidence and the market's reaction," Journal of Financial Economics, Elsevier, vol. 89(1), pages 20-43, July.
    14. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    15. Simon Gervais & J. B. Heaton & Terrance Odean, 2011. "Overconfidence, Compensation Contracts, and Capital Budgeting," Journal of Finance, American Finance Association, vol. 66(5), pages 1735-1777, October.
    16. Ofra Amir & David G Rand & Ya'akov Kobi Gal, 2012. "Economic Games on the Internet: The Effect of $1 Stakes," PLOS ONE, Public Library of Science, vol. 7(2), pages 1-4, February.
    17. Anderhub, Vital & Muller, Rudolf & Schmidt, Carsten, 2001. "Design and evaluation of an economic experiment via the Internet," Journal of Economic Behavior & Organization, Elsevier, vol. 46(2), pages 227-247, October.
    18. Menkhoff, Lukas & Schmeling, Maik & Schmidt, Ulrich, 2013. "Overconfidence, experience, and professionalism: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 86(C), pages 92-101.
    19. Ian Larkin & Stephen Leider, 2012. "Incentive Schemes, Sorting, and Behavioral Biases of Employees: Experimental Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 184-214, May.
    20. Schrand, Catherine M. & Zechman, Sarah L.C., 2012. "Executive overconfidence and the slippery slope to financial misreporting," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 311-329.
    21. Alberto Galasso & Timothy S. Simcoe, 2011. "CEO Overconfidence and Innovation," Management Science, INFORMS, vol. 57(8), pages 1469-1484, August.
    22. Bruno Biais & Martin Weber, 2009. "Hindsight Bias, Risk Perception, and Investment Performance," Management Science, INFORMS, vol. 55(6), pages 1018-1029, June.
    23. Dan Lovallo & Colin Camerer, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March.
    24. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2009. "Measuring the Financial Sophistication of Households," American Economic Review, American Economic Association, vol. 99(2), pages 393-398, May.
    25. Aktas, Nihat & de Bodt, Eric & Bollaert, Helen & Roll, Richard, 2016. "CEO Narcissism and the Takeover Process: From Private Initiation to Deal Completion," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(1), pages 113-137, February.
    26. Simon Gervais & Itay Goldstein, 2007. "The Positive Effects of Biased Self-Perceptions in Firms," Review of Finance, European Finance Association, vol. 11(3), pages 453-496.
    27. Deshmukh, Sanjay & Goel, Anand M. & Howe, Keith M., 2013. "CEO overconfidence and dividend policy," Journal of Financial Intermediation, Elsevier, vol. 22(3), pages 440-463.
    28. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-955, December.
    29. Uri Gneezy, 2005. "Deception: The Role of Consequences," American Economic Review, American Economic Association, vol. 95(1), pages 384-394, March.
    30. David Hirshleifer & Angie Low & Siew Hong Teoh, 2012. "Are Overconfident CEOs Better Innovators?," Journal of Finance, American Finance Association, vol. 67(4), pages 1457-1498, August.
    31. Lusardi, Annamaria & Mitchell, Olivia S., 2011. "Financial literacy around the world: an overview," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(4), pages 497-508, October.
    32. Almenberg, Johan & Dreber, Anna, 2015. "Gender, stock market participation and financial literacy," Economics Letters, Elsevier, vol. 137(C), pages 140-142.
    33. Brad M. Barber & Terrance Odean, 2001. "Boys will be Boys: Gender, Overconfidence, and Common Stock Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 261-292.
    34. Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall.
    35. Campbell, T. Colin & Gallmeyer, Michael & Johnson, Shane A. & Rutherford, Jessica & Stanley, Brooke W., 2011. "CEO optimism and forced turnover," Journal of Financial Economics, Elsevier, vol. 101(3), pages 695-712, September.
    36. Ulrike Malmendier & Geoffrey Tate & Jon Yan, 2011. "Overconfidence and Early‐Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies," Journal of Finance, American Finance Association, vol. 66(5), pages 1687-1733, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pikulina, E.S. & Renneboog, L.D.R. & Tobler, P.N., 2014. "Overconfidence, Effort, and Investment (Revised version of CentER DP 2013-035)," Other publications TiSEM 0e3cc6fd-6847-4fe5-88da-d, Tilburg University, School of Economics and Management.
    2. Pikulina, Elena & Renneboog, Luc & Tobler, Philippe N., 2018. "Do confident individuals generally work harder?," Journal of Multinational Financial Management, Elsevier, vol. 44(C), pages 51-60.
    3. Prokudina, Elena & Renneboog, Luc & Tobler, Philippe, 2015. "Does Confidence Predict Out-of-Domain Effort?," Discussion Paper 2015-055, Tilburg University, Center for Economic Research.
    4. Johannes Brunzel, 2021. "Overconfidence and narcissism among the upper echelons: a systematic literature review," Management Review Quarterly, Springer, vol. 71(3), pages 585-623, July.
    5. Helen X. H. Bao & Steven Haotong Li, 2016. "Overconfidence And Real Estate Research: A Survey Of The Literature," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(04), pages 1-24, September.
    6. Chen, Si & Schildberg-Hörisch, Hannah, 2019. "Looking at the bright side: The motivational value of confidence," European Economic Review, Elsevier, vol. 120(C).
    7. Huang, Ronghong & Tan, Kelvin Jui Keng & Faff, Robert W., 2016. "CEO overconfidence and corporate debt maturity," Journal of Corporate Finance, Elsevier, vol. 36(C), pages 93-110.
    8. Bharati, Rakesh & Doellman, Thomas & Fu, Xudong, 2016. "CEO confidence and stock returns," Journal of Contemporary Accounting and Economics, Elsevier, vol. 12(1), pages 89-110.
    9. Lin, Tse-Chun & Pursiainen, Vesa, 2023. "Gender differences in reward-based crowdfunding," Journal of Financial Intermediation, Elsevier, vol. 53(C).
    10. Chen, Yenn-Ru & Ho, Keng-Yu & Yeh, Chia-Wei, 2020. "CEO overconfidence and corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 62(C).
    11. Lai, Shaojie & Li, Xiaorong & Chan, Kam C., 2021. "CEO overconfidence and labor investment efficiency," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    12. André Betzer & Inga Bongard & Felix Schweder & Erik Theissen & Christine Volkmann, 2023. "All is not lost that is delayed: overconfidence and investment outcomes," Review of Managerial Science, Springer, vol. 17(7), pages 2297-2324, October.
    13. Aktas, Nihat & Louca, Christodoulos & Petmezas, Dimitris, 2019. "CEO overconfidence and the value of corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 54(C), pages 85-106.
    14. Ulrike Malmendier & Vincenzo Pezone & Hui Zheng, 2023. "Managerial Duties and Managerial Biases," Management Science, INFORMS, vol. 69(6), pages 3174-3201, June.
    15. Juwon Jang & Eunju Lee, 2024. "CEO confidence matters: the real effects of short sale constraints revisited," Review of Quantitative Finance and Accounting, Springer, vol. 62(2), pages 603-636, February.
    16. Athanasakou, Vasiliki & Ferreira, Daniel & Goh, Lisa, 2022. "Changes in CEO stock option grants: a look at the numbers," LSE Research Online Documents on Economics 115609, London School of Economics and Political Science, LSE Library.
    17. Athanasakou, Vasiliki & Ferreira, Daniel & Goh, Lisa, 2022. "Changes in CEO stock option grants: A look at the numbers," Journal of Corporate Finance, Elsevier, vol. 75(C).
    18. Ge, Li & Jamil, Taher & Yu, Jin, 2024. "CEO overconfidence and the choice of debt issuance," Journal of Banking & Finance, Elsevier, vol. 161(C).
    19. Chen, Sheng-Syan & Ho, Keng-Yu & Ho, Po-Hsin & Nie, Wei-Ying, 2022. "CEO overconfidence and bondholder wealth effects: Evidence from mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 77(C).
    20. Tuck Siong Chung & Angie Low & Roland T. Rust, 2023. "Executive confidence and myopic marketing management," Journal of the Academy of Marketing Science, Springer, vol. 51(5), pages 1118-1142, September.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tiu:tiutis:940a1d28-f38f-4953-9790-55229b401b86. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Richard Broekman (email available below). General contact details of provider: https://www.tilburguniversity.edu/about/schools/economics-and-management/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.