a b s t r a c tThe most common test for overconfidence in the form of miscalibration-the interval production task (IP)-is based on the assumption that people internalize requested confidence levels. We demonstrate experimentally that decision makers' perceived confidence is, however, unaffected by variations in the requested confidence level. In addition, we find large heterogeneity in perceived confidence that the traditional IP measure fails to account for. We show that the alternative measure based on decision makers' perceived confidence by contrast yields coherent, moderate overconfidence levels. Our evidence suggests that the consistency of the two measures is limited and that they are related to different individual characteristics.
This study provides new insights on how investors form beliefs about future asset prices and how they use these beliefs for their trading decisions. Compared to the objective Bayesian benchmark, investors become overly optimistic when they face a paper loss. In addition, selling decisions are less sensitive to beliefs than purchase decisions. This difference is driven by selling behavior in the presence of paper losses. Our insights stem from a laboratory experiment in which participants are price-takers and trade a stock governed by a persistent two-state Markov chain. At each point in time, we elicit incentivized beliefs about the probability that the stock price will increase in the next period.
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