Overconfident investors and probability misjudgments |
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Authors: | Doron Kliger Ori Levy |
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Institution: | 1. The University of Haifa, Department of Economics, Mount Carmel, 31905 Haifa, Israel;2. Coral Capital Management, United States |
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Abstract: | This paper explores systematic distortions of subjective probabilities by overconfident investors. In agreement with many non-expected utility theories, our devised setup acknowledges nonlinear weighting of physical probabilities by both rational and overconfident investors. Overconfidence – assumed to be higher after a history of gains and lower after a history of losses – changes these probability transformations. Using US asset price data, overconfident investors are found to be more optimistic than rational investors about future prospects. |
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