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Overconfidence and Disappointment in Decision‐making under Risk: The Triumph of Hope over Experience
Author(s) -
Ringuest Jeffrey L.,
Graves Samuel B.
Publication year - 2017
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.2784
Subject(s) - disappointment , overconfidence effect , economics , actuarial science , econometrics , variance (accounting) , behavioral economics , financial economics , psychology , microeconomics , social psychology , accounting
Overconfidence in economic decision‐making is a well‐established phenomenon; however, assessment of its scale and impact are largely absent from the literature. This paper uses Bell's disappointment metric to quantify its impact on individual decision‐makers in a risky investment setting. We are able to quantify the sensitivity of disappointment to overconfidence. We examine disappointment in both deterministic and stochastic models, finding that in the most likely cases, individual investors experience lower disappointment when variance is higher. We are also able to quantify and compare calibration‐based overconfidence and better‐than‐average overconfidence. Contrary to prior research, we find that their magnitudes are the same. Copyright © 2016 John Wiley & Sons, Ltd.