Overconfidence, risk aversion and individual financial decisions in experimental asset markets

Julija Michailova, Alminas Mačiulis and Manuela Tvaronavičienė

Economic Research-Ekonomska Istraživanja, 2017, vol. 30, issue 1, 1119-1131

Abstract: Prior experiments revealed that investors’ overconfidence can result in excessive trade and negative wealth effects. However, in most of these studies, informational asymmetries were part of the experimental design, and therefore no clear conclusion on whether the obtained results were driven by overconfidence or informational asymmetries could be made. The article addresses this issue by analysing individual financial decisions based on the study of Michailova and Schmidt, who ran an asset markets experiment with no informational asymmetries. Additionally, the study controls for differences in individual risk aversion. The data revealed that, in this setting, individual trading activity and performance were influenced by overconfidence only for female participants. Mistakes in future price forecasting, which were negatively correlated with overconfidence, partially accounted for this result. Risk aversion was uncorrelated with overconfidence and had no influence on experimental outcomes.

Date: 2017
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DOI: 10.1080/1331677X.2017.1311234

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