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Expert Overconfidence?

Posted in Investing Expertise

In media interviews and in their own columns, expert investors often project high levels of confidence regarding their opinion of market direction and their stock recommendations. Are they overconfident with respect to their private information and/or abilities? In their paper “Overconfidence of Professionals and Lay Men: Individual Differences Within and Between Tasks?”, Markus Glaser, Thomas Langer and Martin Weber analyze whether professional traders and investment bankers are overconfident in their judgments to the same degree as non-professionals. Based on testing of 33 professional traders and 90 investment bankers, and of control groups of advanced students specializing in finance and banking, they conclude that:

  • Professionals are generally overconfident to a significantly greater degree than a control group.
  • Some investors strongly underestimate the volatility of stock returns; others overestimate historical volatility.
  • On average, investors are overly precise in their projection of a trend based on historical data (predicted range too small).
  • For a given individual, the degree of overconfidence is persistent for a given type of task but varies across different types of tasks.

In summary, expertise does not mitigate bias. Even highly experienced investors/traders should consider measuring their estimation errors for related tasks to calibrate their judgments.

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