Identifying the Effects of Unjustified Confidence Versus Overconfidence: Lessons Learned from Two Analytic Methods

Parker, Andrew M.; Stone, Eric R.

doi:10.2139/ssrn.1554686

Cited by 10 publications

(24 citation statements)

References 26 publications

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“…For each study, we use linear regression to examine how confidence predicted the composite measure of self-reported retirement planning, after controlling for knowledge. We favored this characterization of unjustified confidence (predictive ability of confidence, controlling for knowledge; Parker & Stone, 2010) over the more common under/overconfidence score (mean confidence minus percent correct), both because the latter could not be computed for Studies 1 and 3 and because of the potential for both confidence and knowledge to be correlated with the dependent variable in the same direction. Finally, because fee minimization when investing (Study 3) is arguably a behavioral outcome of having more knowledge, it is also an appropriate validation measure.…”

Section: Methodsmentioning

confidence: 99%

“…Without translating verbal probability expressions into numerical probabilities, such rating scales render it impossible to compute a difference measure of under/overconfidence , which would require that both overall confidence and knowledge are expressed as a ratio-scaled percentage. An alternative to this difference measure (as well as others that rely on ratio-scale confidence assessments) is to instead focus on the degree to which confidence varies independently of knowledge (see Jaccard, Dodge, & Guilamo-Ramos, 2005; Parker & Stone, 2010). Although such a measure of the appropriateness of confidence does not allow for a direct comparison between absolute levels of confidence and knowledge, it is easily computed using regression techniques.…”

Section: Evaluating Confidencementioning

confidence: 99%

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Inappropriate Confidence and Retirement Planning: Four Studies with a National Sample

Parker

Bruin

Yoong

et al. 2011

Behavioral Decision Making

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122

102

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Financial decisions about investing and saving for retirement are increasingly complex, requiring financial knowledge and confidence in that knowledge. Few studies have examined whether direct assessments of individuals’ confidence are related to the outcomes of their financial decisions. Here, we analyzed data from a national sample recruited through RAND’s American Life Panel (ALP), an internet panel of U.S. adults aged 18 to 88. We examined the relationship of confidence with self-reported and actual financial decisions, using four different tasks, each performed by overlapping samples of ALP participants. The four tasks were designed by different researchers for different purposes, using different methods to assess confidence. Yet, measures of confidence were correlated across tasks, and results were consistent across methodologies. Confidence and knowledge showed only modest positive correlations. However, even after controlling for actual knowledge, individuals with greater confidence were more likely to report financial planning for retirement and to successfully minimize fees on a hypothetical investment task. Implications for the role of confidence (even if it is unjustified) in investment behavior is discussed.

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Section: Methodsmentioning

confidence: 99%

Section: Evaluating Confidencementioning

confidence: 99%

Inappropriate Confidence and Retirement Planning: Four Studies with a National Sample

Parker

Bruin

Yoong

et al. 2011

Behavioral Decision Making

Self Cite

122

102

View full text Add to dashboard Cite

show abstract

“…To derive a measure of perceived financial sophistication not justified by actual sophistication, we therefore follow Parker and Stone (2014) and calculate the residual from a regression of the confidence score on the financial literacy score. Panel C of Table 3 displays the mean of this "unjustified confidence" score, which captures both underconfidence (if negative) and overconfidence (if positive), over the different subgroups of sample respondents.…”

Section: Datamentioning

confidence: 99%

Skilled But Unaware of It: Occurrence and Potential Long-Term Effects of Females' Financial Underconfidence

Bannier

Schwarz

2017

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractThis study examines actual and perceived financial sophistication (i.e., financial literacy and confidence) and its relation with individuals' current financial market participation and future-oriented financial planning. Using survey data from the German SAVE initiative, we find strong gender-and education-related differences in the distribution of the two variables:Whereas financial literacy rises in formal education, confidence increases in education for men but decreases for women. As a consequence, highly-educated women become strongly underconfident, while men remain overconfident. We show that these differences influence financial engagement:The financial decisions of highly-educated men benefit strongly from their excess confidence.Highly-educated women, in contrast, gain from their strong actual financial literacy with regard to current financial market participation, but their underconfidence impairs their long-term financial planning.JEL Classification: D91, G11, D83, J26

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“…To derive a measure of subjective confidence not justified by objective financial literacy, we therefore follow Parker and Stone (2014) and calculate the residual from a regression of the confidence score on the financial literacy score. Panel C of Table 3 displays the mean of this "unjustified confidence" score, which captures both underconfidence (if negative) and overconfidence (if positive), over the different subgroups of sample respondents.…”

Section: Datamentioning

confidence: 99%

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

Bannier

Neubert

2016

SSRN Journal

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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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Identifying the Effects of Unjustified Confidence Versus Overconfidence: Lessons Learned from Two Analytic Methods

Cited by 10 publications

References 26 publications

Inappropriate Confidence and Retirement Planning: Four Studies with a National Sample

Inappropriate Confidence and Retirement Planning: Four Studies with a National Sample

Skilled But Unaware of It: Occurrence and Potential Long-Term Effects of Females' Financial Underconfidence

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

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