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Does it really get better with age? Life-cycle patterns of confidence in Germany

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  • Pannenberg, Markus
  • Friehe, Tim

Abstract

This paper investigates if and how confidence at the individual level changes over the course of a life. We provide age profiles of a novel continuous confidence measure and the probability of overconfidence, conditioning on personality traits (including the Big Five and optimism), economic preferences, cognitive ability, and the individual's socioeconomic status. Our empirical work relies on a representative panel data set from Germany and individuals' self-assessment of their position in the gross wage distribution as our measure of confidence. We find that both the level of confidence and the overconfidence probability increase non-linearly with age up to the fifties. To illustrate the economic importance of the identified age gradient, we consider how both confidence measures predict savings and loan choices of households. We find that high wage-related confidence levels are, in all likelihood, a hindrance for prudent financial decisions in preparation for old age.

Suggested Citation

  • Pannenberg, Markus & Friehe, Tim, 2019. "Does it really get better with age? Life-cycle patterns of confidence in Germany," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203497, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc19:203497
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    Keywords

    Confidence; Age; Wage distribution; Germany; SOEP;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination

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