Overconfidence in investment decisions: An experimental approach

By experimentally inducing risk aversion, overconfidence in an investment setting is investigated, comparing the evaluation of actual investment decisions with alternative choices. After selecting their own investment, subjects confront three alternative investment choices, including the optimal one, and are asked about their willingness to pay and to substitute their own for alternative choices. Overconfidence is defined as the persistent overevaluation of the own investment decision. Results indicate that overconfidence increases (i) with the absolute deviation from optimal choices, (ii) with task complexity involving the number of risky assets, and (iii) decreases with individual perceived uncertainty.