Judgemental Overconfidence, Self-Monitoring, and Trading Performance in an Experimental Financial Market

Abstract

We measure the degree of overconfidence in judgement (in the form of miscalibration, "i.e." the tendency to overestimate the precision of one's information) and self-monitoring (a form of attentiveness to social cues) of 245 participants and also observe their behaviour in an experimental financial market under asymmetric information. Miscalibrated traders, underestimating the conditional uncertainty about the asset value, are expected to be especially vulnerable to the winner's curse. High self-monitors are expected to behave strategically and achieve superior results. Our empirical results show that miscalibration reduces and self-monitoring enhances trading performance. The effect of the psychological variables is strong for men but non-existent for women. Copyright The Review of Economic Studies Limited, 2005.

Hindsight Bias, Risk Perception, and Investment Performance

“…This is in the line of several recent field experiments on financial decision and psychology. 3 Our analysis is also in the line of several recent papers empirically relating psychological constructs to economic variables (see Camerer (1987), Fenton O'Creevy (2003, Biais et al (2005), and Glaser and Weber (2007)). …”

“…Another form of overconfidence which has received attention in finance is miscalibration (see Biais et al (2005)). In line with Russo and Schoemaker (1992) and Klayman et al (1999), we measure miscalibration by eliciting confidence intervals.…”

Deception and Self-Deception

“…At the same time, evidence shows that overconfidence is costly. It leads financial traders to make less money (Barber and Odean, 2001;Biais and Hilton, 2005), CEO's to initiate more value-destroying mergers (Malmendier and Tate, 2008), and entrepreneurs to invest more often in low value projects (Koellinger et al, 2007;Dawson et al, 2015).…”

Entrepreneuring as a puzzle: an attempt to its explanation with truncation of subjective probability distribution of prospects

“…Interestingly, a specifi c kind of credence is in one's own judgment, which Biais, Hilton, Mazurier, and Pouget (2005) refer to as miscalibration. These authors argue that miscalibrated judgment tends to overestimate the precision of available information.…”