Hindsight bias, risk perception and investment performance

Once they have observed information, hindsight biased agents fail to remember how ignorant they were initially, “they knew it all along.” We formulate a theoretical model of this bias, providing a foundation for empirical measures, and implying that hindsight biased agents learning about volatility will underestimate it. In an experiment involving 67 students from Mannheim University, we find that hindsight bias reduces volatility estimates. In another experiment, involving 85 investment bankers in London and Frankfurt, we find that more biased agents have lower performance. These findings are robust to differences in location, information, overconfidence and experience

Hindsight Bias And The Evaluation Of Strategic Performance

This article reviews the literature on hindsight bias and applies it to the context of strategic performance evaluation. Hindsight bias, the tendency for people to view an event as more foreseeable after the event than prior to the event, is a well-documented cognitive bias. In evaluating the quality of the processes by which strategic decisions are made, evaluators are aware of the outcomes of these decisions and, therefore, are subject to the distorting effects of hindsight bias. Preventative measures are reviewed and recommendations for further research suggested

Worldview, Risk Perception and Underwriting Performance: An Empirical Study of Property/Liability Insurance Industry

[[abstract]]Underwriting process is the core function of property/liability insurance companies. An appropriate underwriting policy can avoid adverse selection and make sure that insurance companies select only those insured whose actual loss will not exceed the expected loss. This study attempts to connect the culture theory of risk, risk perception with underwriting performance of underwriters in property/liability insurance companies. This study explores the effects of different types of worldviews upon the underwriting performance and evaluates various underwriters’ financial risk perception based on different worldview by use of conjoint expected risk model. Interesting and fascinated empirical evidence could be found that risk perceptions represent a considerable part on underwriting process, which has not been found yet in previous finance or insurance literature.[[journaltype]]國外[[incitationindex]]EI[[ispeerreviewed]]Y[[booktype]]紙本[[countrycodes]]US

Can Investing Diaries be Hazardous to Your Financial Health?

Business writers and academics have suggested keeping an investing diary to avoid hindsight bias. In the diary, investors justify their predictions of future events, e.g., “This stock will go up because…” Eliminating hindsight bias should improve future returns. However, psychological research on the “explanation effect” suggests that justifying one’s predictions in writing induces overconfidence and, by consequence, reduces current returns. We test these propositions in a set of prediction markets populated by two types of traders: forecasters who completed a required investing diary task and non-forecasters who did not. The portfolios of forecasters were significantly over-invested in securities associated with the forecaster’s prediction. This is consistent with prior psychological research and a clear sign of investor over-confidence. We further find that forecasters with accurate predictions have higher returns than those with inaccurate predictions. However, the returns for forecasters with inaccurate predictions were generally no worse than the returns of the non-forecasters. Our results suggest that while keeping an investing diary may lead to biased portfolios, it does not have an overall negative effect on current returns. Therefore, contrary to expectations, there is not a trade-off between the long-term and short-term effects of an investing diary

Factors forming irrational Lithuanian individual investors’ behaviour

The paper aims to identify factors forming irrational individual investors’ behaviour on the Lithuanian stock market. For this purpose and on the basis of the results of scientific literature research, factors forming irrational behaviour of individual investors were identified and used for preparing a questionnaire for individual investors actively trading on the Lithuanian stock market. In addition, a complex research methodology for identifying factors forming/determining irrational investor behaviour was developed. The results of the study identify basic factors forming Lithuanian individual investors’ behaviour on the stock market and illustrate the logical relationship between these factors and individual investors’ personal characteristics such as gender, age, investment experience and professionStaripsnyje siekiama nustatyti pagrindinius iracionalią individualių investuotojų elgseną formuojančius veiksnius Lietuvos vertybinių popierių rinkoje. Šiuo tikslu ir remiantis mokslinės literatūros tyrimų rezultatais buvo išskirti iracionalią individualių investuotojų elgseną formuojantys veiksniai ir panaudoti rengiant aktyviai Lietuvos vertybinių popierių rinkoje prekiaujantčių individualių investuotojų apklausą. Taip pat buvo sukurta kompleksinė tyrimų metodika, leidžianti nustatyti iracionalią investuotojų elgseną formuojančius veiksnius. Gauti tyrimo rezultatai atskleidžia pagrindinius Lietuvos individualių investuotojų elgseną vertybinių popierių rinkoje formuojančius veiksnius ir loginį ryšį tarp jų ir individualių investuotojų asmeninių savybių, tokių kaip lytis, amžius, investavimo patirtis ir profesija

Overreaction in stock forecasts and prices

We study the degree of individual and aggregate market overreaction in a dynamic experimental auction market. In 13 sessions with overall 101 students we find overreaction to new information both in stock price forecasts and transaction prices. Interestingly, market forces do not seem to help in lowering overreaction to new information in our setting. Moreover, we illustrate that subjects are not able to learn from their previous failures and thus do not correct their erroneous beliefs. Hence, overreaction in our setting remains on a stable level although subjects can at least in theory learn from other market participants or from outcome feedback. Lastly, we find first experimental evidence for a positive relation between differences of opinion and trading volume in a continuous auction market with several market participants

Opening the black box: From an individual bias to portfolio performance

We suggest an experimental design that can help opening the black box of investor behavior by documenting a channel of how biases affect portfolio performance. We study two of the most important investor biases (overreaction and overconfidence), show how they are related, and analyze their consequences for portfolio choice and resulting portfolio performance in a controlled experimental setting with 104 participants. The main innovation of our study is that we go beyond just documenting a correlation between overconfidence on the one hand and investor behavior as well as resulting portfolio performance on the other hand. We empirically identify the precise channel (overreaction) which is proposed by some models. We find that subjects overreact on average, i.e. forecasts are too optimistic after positive signals and too pessimistic after negative signals. Furthermore, there is greater overreaction when subjects are more overconfident. Moreover, overreaction is related to risk taking in a portfolio choice task thereby adversely affecting portfolio efficiency