Hubris or Talent? Estimating the Role of Overconfidence in Chinese households’ Investment Decisions

We document the extent to which overconfidence in one’s financial literacy (FL overconfidence) plays a role in households’ reported financial risk aversion and their actual investment behavior, using data from the China Household Finance Survey. We measure FL overconfidence by estimating the gap between people’s self-reported financial literacy and their objectively measured financial knowledge. Our results indicate that FL overconfidence is negatively associated with self-reported financial risk aversion. Additionally, FL overconfidence is positively associated with the likelihood of having a brokerage account, holding risky financial instruments (other than just stock), and a proportion of assets allocated towards risky assets. We then use machine learning methods to predict which factors are most important in determining households’ risky investment decisions. We find that overconfidence plays a significant predictive role. Our work signals that households’ risky investments may be driven by biased optimism about their own financial know-how rather than their actual knowledge. We conclude that financial literacy programs should not only teach financial concepts but also make program participants aware of their own biases

Luck Feelings, Luck Beliefs, and Decision Making

Luck feelings have long been thought to influence decision making involving risk. Previous research has established the importance of prior outcomes, luck beliefs, and counterfactual thinking in the generation of luck feelings, but there has been no comprehensive demonstration of this system of variables that impinge on luck feelings. Moreover, the actual relationship of luck feelings and risky choice has not been directly tested. Addressing these gaps, results from five studies are presented in this thesis. Empirical work begins with an extensive validation exercise of an existing 22-item luck beliefs scale. Those 22 items are refined to a 16-item scale, comprising four luck belief dimensions that inter-relate in a compelling structural arrangement. Insights from this exercise, and a subset of the items are used throughout the remainder of the thesis. Results from two studies contradicted the counterfactual closeness hypothesis, the most prominent theory in the psychology of luck, which holds that counterfactual thinking is essential for generating lucky feelings. However, one study found that affect and luck feelings are not unitary, as evidenced by a weak form of double dissociation of affect and lucky feelings from overestimation and overplacement. Another study found lucky and unlucky feelings to be distinct. The effects of lucky feelings and unlucky feelings on risky choice differ by the nature of a prior outcome. For negative outcomes, unlucky feelings are likely to influence risky choices. For positive outcomes, lucky feelings are likely to influence risky choices. The type of risky choice most affected by lucky feelings—for positive experiences—is ambiguity tolerance in the probability distributions of prospective outcomes. The Activation Theory of Luck Feelings (ActLF) is proposed, which reconciles previous findings to those reported herein

The Behaviour of Corporate Actors. A Survey of the Empirical Literature

Much of behavioural research, both in economics and in psychology, is limited in one respect: it tests isolated individuals. In many practically relevant situations, there are discernible actors, but these actors are not individuals. Rather firms, regulatory bodies, associations, countries or international organisations become active. The social problem at hand is best understood if one attributes judgement and decision making to higher level aggregates of individuals. Which elements from the rich body of behavioural evidence transfer to these corporate actors? Are there other deviations from the predictions of the rational choice model, not present or studied in individuals? This paper surveys the empirical literature from experimental economics, psychology, sociology and law. While some building blocks, like the behaviour of managers and of ad hoc groups, are relatively well understood, our knowledge about the effects of more elaborate internal structure on the dealings of corporate actors with the outer world is still relatively limited.Behaviour, Firms, Organizations, Associations, Groups

Cognitive abilities and portfolio choice

We study the relation between cognitive abilities and stockholding using the recent Survey of Health, Ageing and Retirement in Europe (SHARE), which has detailed data on wealth and portfolio composition of individuals aged 50+ in 11 European countries and three indicators of cognitive abilities: mathematical, verbal fluency, and recall skills. We find that the propensity to invest in stocks is strongly associated with cognitive abilities, for both direct stock market participation and indirect participation through mutual funds and retirement accounts. Since the decision to invest in less information-intensive assets (such as bonds) is less strongly related to cognitive abilities, we conclude that the association between cognitive abilities and stockholding is driven by information constraints, rather than by features of preferences or psychological traits

The impact of neo-brokers on the overconfidence bias of young retail investors in Germany

Neo-brokers play an essential role in the increase of young retail investors in Germany. Providing commission-free, low-cost trading and an engaging user experience, neo-brokers stimulate the investment behavior of young investors. By collecting data through an online survey, the impact of neo-brokers in Germany on the overconfidence bias of young retail investors will be examined. Setting up hierarchical binary logistic regression models, the study finds that young retail investors trade more frequently when investing through neo-brokers. However, there is no evidence that men trade more than women and thereby achieve lower returns when using neo-broker

Unconscious Bias in Infrastructure Project Finance Decisions

A modern and functioning infrastructure is the key to maintaining the competitiveness of economies. In many countries, however, there are serious gaps in the supply of infrastructure, not least due to public budget bottlenecks. Therefore, the importance of project financing of public infrastructure has strongly increased for theory and practice. Numerous failed projects show that the success of this financing structure depends above all on realistic risk assessment. For this, project risks need to be understood in their full complexity. This includes in particular the risk of investors and lenders to misperceive the uncertainty in the decision-making situation. Heuristics and cognitive bias can lead decision makers to under- and overvalue risks and rewards. The goal of this dissertation was thus to understand the use of unrealistic optimism among investors and lenders in infrastructure project finance to find ways to make the risk assessments more realistic, optimize spending, and contribute to closing the infrastructure finance gap. To achieve this a theoretical causal bias model of individual decision maker unrealistic optimism and a predictive model of company unrealistic optimism were developed and tested with a survey among 102 relevant decision stakeholders. A major finding is that unrealistic optimism influences risk assessment in the financing of European infrastructure projects. Company related factors, personal factors, and overconfidence influence this unrealistic optimism on individual level. Unrealistic optimism on company level is further influenced by the institutional structure and objective company characteristics. The findings of the dissertation result in significant theoretical and practical contributions by showing that unrealistic optimism is at least partly situational and not strictly rooted in the head of the decision maker no matter the circumstance. Companies can thus reduce unrealistic optimism of their employees by applying the right institutional structure and team setting

Financial Advice and Stock Market Participation

We introduce professional financial advice in households? choice to hold risky financial assets. Consistent with the predictions from a formal model, we present evidence that households? trust in financial advice only matters when their perceived own financial capability is low. Instead, for households with higher financial capability, only the perception of legal protection in financial markets matters for stock market participation. Our empirical analysis highlights economically significant differences in households? perception of their rights as consumers of financial services, even when their objective circumstances should not be much different.Financial Advice, Trust, Consumer Protection, Household Finance

Financial advice and stock market participation

We introduce professional financial advice in households’ choice to hold risky financial assets. Consistent with the predictions from a formal model, we present evidence that households’ trust in financial advice only matters when their perceived own financial capability is low. Instead, for households with higher financial capability, only the perception of legal protection in financial markets matters for stock market participation. Our empirical analysis highlights economically significant differences in households’ perception of their rights as consumers of financial services, even when their objective circumstances should not be much different. JEL Classification: E1, G2, D8Consumer Protection, Financial Advice, Household finance, Trust

Calibrating Expert Assessments of Advanced Aerospace Technology Adoption Impact

This dissertation describes the development of expert judgment calibration methodology as part of elicitation of the expert judgments to assist in the task of quantifying parameter uncertainty for proposed new aerospace vehicles. From previous work, it has been shown that experts in the field of aerospace systems design and development can provide valuable input into the sizing and conceptual design of future space launch vehicles employing advanced technology. In particular (and of specific interest in this case), assessment of operations and support cost implications of adopting proposed new technology is frequently asked of the experts. Often the input consisting of estimates and opinions is imprecise and may be offered with less than a high degree of confidence in its efficacy. Since the sizing and design of advanced space or launch vehicles must ultimately have costs attached to them (for subsequent program advocacy and tradeoff studies), the lack of precision in parameter estimates will be detrimental to the development of viable cost models to support the advocacy and tradeoffs. It is postulated that a system, which could accurately apply a measure of calibration to the imprecise and/or low-confidence estimates of the surveyed experts, would greatly enhance the derived parametric data. The development of such a calibration aid has been the thrust of this effort. Bayesian network methodology, augmented by uncertainty modeling and aggregation techniques, among others, were employed in the tool construction. Appropriate survey questionnaire instruments were compiled for use in acquiring the experts\u27 input; the responses served as input to a test case for validation of the resulting calibration model. Application of the derived techniques were applied as part of a larger expert assessment elicitation and aggregation study. Results of this research show that calibration of expert judgments, particularly for far-term events, appears to be possible. Suggestions for refinement and extension of the development are presented