Financial Competence, Overconfidence, and Trusting Investments: Results from an Experiment

Bryan McCannon, Colleen Asaad and Mark Wilson
Additional contact information
Colleen Asaad: Baldwin-Wallace University
Mark Wilson: St. Bonaventure University

No 15-26, Working Papers from Department of Economics, West Virginia University

Abstract: Financial transactions sometimes occur in an environment where third-party enforcement is lacking. Behavioral explanations typically allude to the social preferences, where an individual’s utility is directly affected by another’s outcome, as the driver of the trusting investments and reciprocal returns. We hypothesize that, in part, these decisions are determined by an individual’s financial literacy. Experimental evidence is coupled with an innovative financial literacy assessment, which measures general competence, numeracy skills, and overconfidence in one’s knowledge. Results indicate that overconfidence is a significant determinant of behavior. Specifically, overconfident individuals make larger contributions in the investment game. We also document that there is an escalated effect in overconfident individuals who are also exhibit risk loving preferences.

Keywords: experiment; financial literacy; investment; overconfidence; social preferences; risk preferences (search for similar items in EconPapers)
JEL-codes: C91 D03 G02 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2015-08
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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