Volume 6, Number 3, 2005 Abstracts
© Copyright Erlbaum 2005

Bidding and Overconfidence in Experimental Financial Markets
W. David Allen-University of Alabama in Huntsville
Dorla A. Evans-University of Alabama in Huntsville

Overconfidence is a well-documented phenomenon in psychology. Psychologists define an overconfident individual as one who believes he has more accurate information than he actually does. Recently, behavioral economists have become interested in the implications of trader overconfidence for financial decision-making and the functioning of financial markets. To date, most financial market studies have been analytical in nature. These studies assume that traders are overconfident and model decision-making behavior accordingly. Rather than assuming the presence of overconfidence, we use experimental bidding data to determine the extent to which trader overconfidence exists, and what variables suggested by previous finance and psychology research relate to it. We find approximately 40% of subjects exhibited overconfidence. Variables that distinguish overconfident bidding from risk-averse and risk-neutral bidding include the traditional financial variables that explain bidding (expected value and standard deviation), non-traditional financial variables, and variables relating to the self-attribution bias and feedback. Contrary to what some analysts have suggested, experience did not reduce overconfidence.

The Perception of Control and the Level of Overconfidence: Evidence from Analyst Earnings Estimates and Price Targets
Olaf Stotz-RWTH Aachen University
Rudiger von Nitzsch-RWTH Aachen University

The majority of analysts failed to predict the recent stock market downturn at all, or, if they did, then not to its full extent. Apart from the well-known conflicts of interest, forecasts can be distorted by psychological factors. On average, financial analysts forecast earnings and prices with a positive bias. This study examines why financial analysts are overconfident, i.e., why they overestimate their abilities to forecast earnings and prices. Our empirical findings support the hypothesis that overconfidence intensifies with an increasing perception of control.

Development and Validation of a Model and Measure of Financial Risk-Taking
Niklas Lampenius-Universitat der Bundeswehr in Munich
Michael J. Zickar-Bowling Green University

This study presents a theoretical model and assessment tool that measures individual differences in risk-aversion in financial matters. Unlike other measures of financial risk-taking, this measure assumes no prior technical knowledge of finance. The assessment tool was developed using item response theory as well as classical test theory methods. The measure is tested for predictive validity through various procedures and proves to have those properties. In addition the measure is tested for construct validity using structural equation modeling and allows for the successful classification of individuals in one of four classifications: Non-Investor, Risk Managing Investor, Conservative Investor, and Speculator. We discuss potential applications of this measure.

Social Mood and Financial Economics
John R. Nofsinger-Washington State University

The general level of optimism/pessimism in society is reflected by the emotions of financial decision-makers. Because these emotions are correlated across economic participants, our hypothesis leads to three important outcomes. First, social mood determines the types of decisions made by consumers, investors, and corporate managers alike. Extremes in social mood are characterized by optimistic (pessimistic) aggregate investment and business activity. Second, due to the efficient and emotional nature of stock transactions, the stock market itself is a direct measure or gauge of social mood. Third, since the tone and character of business activity follows, rather than leads, social mood, stock market trends help forecast future financial and economic activity. Specific predictions about stock market levels and trading volume, market volatility, firm expansion, leverage use, and IPO and M&A activity are also given.

Research Elsewhere
Robert A. Olsen-California State University, Chico, and Decision Research

Book Reviews
Robert A. Olsen-California State University, Chico, and Decision Research