Financial Professionals' Overconfidence: Is It Experience, Function, or Attitude?

Gloede, Oliver; Menkhoff, Lukas

doi:10.1111/j.1468-036x.2011.00636.x

“…Since differences in self-perceptions have been attributed to, inter alia, gender stereotypes (Niederle and Vesterlund, 2007) and metacognitive skills (Kruger and Dunning, 1999), we take particular care in allowing for potential gender disparities and gaps in formal education. In doing so, we complement the earlier literature on behavioral biases in financial decisions that has mainly considered the choices of male experts, for instance executive managers (Gervais, Heaton, and Odean, 2011;Adam, Fernando, and Golubeva, 2015;Huang, Tan, and Faff, 2015), portfolio managers (Puetz and Ruenzi, 2011;Gloede and Menkhoff, 2014) or traders (Hirshleifer and Luo, 2001;Palomino and Sadrieh, 2011;Sonsino and Regeff, 2013). Less is known about the impact of self-confidence on male and female amateurs' financial decisions and wealth accumulation.…”

Section: Introductionmentioning

confidence: 81%

Actual and Perceived Financial Sophistication and Wealth Accumulation: The Role of Education and Gender

Bannier

¹

,

Neubert

²

2016

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This study examines the role of actual and perceived financial sophistication (i.e., financial literacy and confidence) for individuals' wealth accumulation. Using survey data from the German SAVE initiative, we find strong gender-and education-related differences in the distribution of the two variables and their effects on wealth: As financial literacy rises in formal education, whereas confidence increases in education for men but decreases for women, we observe that women become strongly underconfident with higher education, while men remain overconfident.Regarding wealth accumulation, we show that financial literacy has a positive effect that is stronger for women than for men and that is increasing (decreasing) in education for women (men). Confidence, however, supports only highly-educated men's wealth. When considering different channels for wealth accumulation, we observe that financial literacy is more important for current financial market participation, whereas confidence is more strongly associated with future-oriented financial planning. Overall, we demonstrate that highly-educated men's wealth levels benefit from their overconfidence via all financial decisions considered, but highlyeducated women's financial planning suffers from their underconfidence. This may impair their wealth levels in old age.JEL Classification: D91, G11, D83, J26

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“…We contribute to a growing and highly relevant research area of experimental studies examining behavioral aspects in financial professionals' decision-making (Alevy et al, 2007;Kaustia et al, 2008;Cipriani and Guarino, 2009;Puetz and Ruenzi, 2011;Gloede and Menkhoff, 2014;Cohn et al, 2014;Kirchler et al, 2018). Utilizing an experimental design that allows for a systematic separation of higher moments, potentially driving risk perception and investment propensity, our study facilitates a more comprehensive understanding of how financial professionals assess risks in a financial context in comparison to lay people across nine major economies.…”

Section: Discussionmentioning

confidence: 99%

“…Hence, compared to lay people, financial professionals could be expected to perceive risk more analytically along the normative definitions commonly applied in economics and finance models. In addition, an increasing body of experimental evidence suggests that financial professionals are quite "special" in the sense that their behavior systematically differs from other types of experimental subjects, e.g., with regard to anchoring (Kaustia et al, 2008), herding (Cipriani and Guarino, 2009), overconfidence (Puetz and Ruenzi, 2011;Gloede and Menkhoff, 2014),…”

Section: Introductionmentioning

confidence: 99%

What Drives Risk Perception? A Global Survey with Financial Professionals and Laypeople

Holzmeister

¹

,

Huber

²

,

Kirchler

³

et al. 2020

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Risk is an integral part of many economic decisions, and is vitally important in finance. Despite extensive research on decision-making under risk, little is known about how risks are actually perceived by financial professionals, the key players in global financial markets. In a large-scale survey experiment with 2,213 finance professionals and 4,559 lay people in nine countries representing ∼50% of the world's population and more than 60% of the world's gross domestic product, we expose participants to return distributions with equal expected return and we systematically vary the distributions' next three higher moments. Of these, skewness is the only moment that systematically affects financial professionals' perception of financial risk. Strikingly, variance does not influence risk perception, even though return volatility is the most common risk measure in finance in both academia and the industry. When testing other, compound risk measures, the probability to experience losses is the strongest predictor of what is perceived as being risky. Analyzing professionals' propensity to invest, skewness and loss probability have strong predictive power too. However, volatility and kurtosis also have some additional effect on participants' willingness to invest. Our results are very similar for lay people, and they are robust across and within countries with different cultural backgrounds as well as for different job fields of professionals.

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“…We contribute to a growing and highly relevant research area of experimental studies examining behavioral aspects in financial professionals' decision-making (Alevy et al, 2007;Kaustia et al, 2008;Cipriani and Guarino, 2009;Puetz and Ruenzi, 2011;Gloede and Menkhoff, 2014;Cohn et al, 2014;Kirchler et al, 2018). Utilizing an experimental design that allows for a systematic separation of higher moments, potentially driving risk perception and investment propensity, our study facilitates a more comprehensive understanding of how financial professionals assess risks in a financial context in comparison to lay people across nine major economies.…”

Section: Discussionmentioning

confidence: 99%

“…Hence, compared to lay people, financial professionals could be expected to perceive risk more analytically along the normative definitions commonly applied in economics and finance models. In addition, an increasing body of experimental evidence suggests that financial professionals are quite "special" in the sense that their behavior systematically differs from other types of experimental subjects, e.g., with regard to anchoring (Kaustia et al, 2008), herding (Cipriani and Guarino, 2009), overconfidence (Puetz and Ruenzi, 2011;Gloede and Menkhoff, 2014), cheating (Cohn et al, 2014), risk-taking under social comparison and competition (Kirchler et al, 2018), and with respect to public signal updating in information cascades (Alevy et al, 2007). It would thus not be surprising if financial professionals differ in their perception of financial risk.…”

Section: Introductionmentioning

confidence: 99%

What Drives Risk Perception? A Global Survey with Financial Professionals and Lay People

Holzmeister¹,

Huber²,

Kirchler³

et al. 2019

Preprint

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Risk is an integral part of many economic decisions, and is vitally important in finance. Despite extensive research on decision-making under risk, little is known about how risks are actually perceived by financial professionals, the key players in global financial markets. In a large-scale survey experiment with 2,213 finance professionals and 4,559 lay people in nine countries representing ∼50% of the world's population and more than 60% of the world's gross domestic product, we expose participants to return distributions with equal expected return and we systematically vary the distributions' next three higher moments. Of these, skewness is the only moment that systematically affects financial professionals' perception of financial risk. Strikingly, variance does not influence risk perception, even though return volatility is the most common risk measure in finance in both academia and the industry. When testing other, compound risk measures, the probability to experience losses is the strongest predictor of what is perceived as being risky. Analyzing professionals' propensity to invest, skewness and loss probability also have strong predictive power, while volatility and kurtosis have some additional effect. Our results are very similar for lay people, and they are robust across and within countries with different cultural backgrounds as well as for different job fields of professionals.

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Financial Professionals' Overconfidence: Is It Experience, Function, or Attitude?

Cited by 26 publications

References 57 publications

Actual and Perceived Financial Sophistication and Wealth Accumulation: The Role of Education and Gender

Actual and Perceived Financial Sophistication and Wealth Accumulation: The Role of Education and Gender

What Drives Risk Perception? A Global Survey with Financial Professionals and Laypeople

What Drives Risk Perception? A Global Survey with Financial Professionals and Lay People

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