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We examine how the trade shock from China influences the behavior and investment performance of overconfident CEOs in U.S. firms. We show that the rise of Chinese import competition curbs investments and improves investment value and acquisition performance for firms with overconfident CEOs. Intensified Chinese product competition also reduces the incentives for these firms to expand assets, invest out of cash flows, pursue aggressive financial policies, and increase risk exposure, and enhances their incentives to buy back shares. Overall, the evidence suggests that product market competition is an effective external governance mechanism for curbing the adverse effects of managerial overconfidence.

We use detailed assessments of CEO personalities to explore the nature of CEO overconfidence as it is commonly measured. Longholder, the option-based measure of CEO overconfidence introduced by Malmendier and Tate (2005a) and widely used in the behavioral corporate finance and economics literatures, is significantly related to several specific characteristics that are associated with overconfident individuals as well as individuals with lower ability. Similar relations hold for overconfidence measures based on CEOs’ earnings guidance. Investment-cash flow sensitivities are larger for both Longholder and less able CEOs. After controlling for ability and other characteristics, Longholder CEOs’ investments remain significantly more sensitive to cash flows. These results suggest that overconfidence, as measured by Longholder, is correlated with lower ability but still reflects empirically distinct aspects of overconfidence.

How should decision-making be organized in entrepreneurial teams when founders exhibit confidence biases? New ventures are commonly founded by teams of entrepreneurs, and consequently, they must im...

Of many psychological biases, overconfidence has been described as one of the most powerful. Few studies have focused on collective overconfidence in team decision-making by boards of directors since boards are typically “black boxes”. Based on the shared cognition and trickle-down effect, we examine whether directors are blind to a chairperson's overconfidence. The results suggest that managerial overconfidence spreads among the board members through a “voting mechanism”. The contagion effect is more pronounced in state-owned enterprises that advocate an authoritarian style. However, increasing the number of board meetings to ensure adequate communication and discussion can mitigate this. Furthermore, we found evidence for the effects of contagious overconfidence on investment decisions. These results suggest that the group's overconfidence may be driven by individual cognitive bias, and this contagion effect can be reflected in business decisions. We should pay attention to the psychological bias in the context of collective decision-making.

Much research on advice taking examines how people revise point estimates given input from others. This work has established that people often egocentrically discount advice. If they were to place more weight on advice, their point estimates would be more accurate. Yet the focus on point estimates and accuracy has resulted in a narrow conception of what it means to heed advice. We distinguish between revisions of point estimates and revisions of attendant probability distributions. Point estimates represent a single best guess; distributions represent the probabilities that people assign to all possible answers. A more complete picture of advice taking is provided by considering revisions of distributions, which reflect changes in both confidence and best guesses. We capture this using a new measure of advice utilization: the influence of advice. We observe that, when input from a high-quality advisor largely agrees with a person’s initial opinion, it engenders little change in one’s point estimate and, hence, little change in accuracy yet significantly increases confidence. This pattern suggests more advice taking than generally suspected. However, it is not necessarily beneficial. Because people are typically overconfident to begin with, receiving advice that agrees with their initial opinion can exacerbate overconfidence. In several experiments, we manipulate advisor quality and measure the extent to which advice agrees with a person’s initial opinion. The results allow us to pinpoint circumstances in which heeding advice is beneficial, improving accuracy or reducing overconfidence, as well as circumstances in which it is harmful, hurting accuracy or exacerbating overconfidence. This paper was accepted by Yuval Rottenstreich, judgment and decision making.

Chapter 10 discusses the rational investor, behavioral finance, neurofinance, consensus opinions, and their impacts on stock and other markets. The chapter begins with a discussion of rational investor paradigms, describing the St. Petersburg Paradox and von Neuman-Morgenstern axioms of choice. Essential findings of Prospect Theory are described, including the framing and anchoring problems, myopia, overreaction, overconfidence, and other fundamental problems in pursuing sound rational solutions to investing, and trading problems. Connections between all of these barriers to rational decision-making to finance are explored. Psychological and physiological underpinnings to such problems are offered. Relationships between irrational investors and markets, either efficient or inefficient are discussed. In this discussion, game shows, betting markets, analyst estimates, and consensus forecasts are offered as evidence that cognitively impaired investors can comprise rational markets, while information cascades and herding can lead to irrational markets.

Health-related misinformation, especially in times of a global health crisis, can have severe negative consequences on public health. In the current studies, we investigated the persuasive impact of COVID-19-related misinformation, and whether the valence of the misinformation and recipients' degree of overconfidence affect this impact. In two pre-registered experimental studies, participants (N = 403; N = 437) were exposed to either a positive or a negative news article describing a fictional hospital's high COVID-19 recovery/mortality rates. Half of the participants subsequently received a correction. Attitudes towards the hospital were measured before and after exposure. Results of both studies showed that, as expected, corrections reduced the persuasive impact of misinformation. But whereas some persuasive impact remained for corrected negative misinformation (a continued influence effect), it reversed for corrected positive information, causing people to have more negative attitudes towards the hospital than before exposure to any information (a backfire effect). These results corroborate prior suggestions that continued influence effects are asymmetric: negative misinformation is harder to neutralise than positive misinformation. Participants' overconfidence degrees did not have a moderating role in misinformation effects. Even though corrections decrease the persuasive impact of health-related misinformation, continued influence remains for negative misinformation.

The provision of water and sanitation services is a key challenge worldwide. The size, complexity, and critical nature of the water and wastewater infrastructure providing such services make the planning and management of these systems extremely difficult. Following the digital revolution in many areas of our lives, the water sector has begun to benefit from digital transformation. Effective utilization of remotely sensed weather and soil moisture data for more efficient irrigation (i.e., for food production), better detection of anomalies and faults in pipe networks using artificial intelligence, the use of nature-inspired optimization to improve the management and planning of systems, and greater use of digital twins and robotics all exhibit great potential to change and improve the ways in which complex water systems are managed. However, there are additional risks associated with these developments, including—but not limited to—cybersecurity, incorrect use, and overconfidence in the capability and accuracy of digital solutions and automation. This paper identifies key advances in digital technology that have found application in the water sector, and applies forensic engineering principles to failures that have been experienced in industries further ahead with automation and digital transformation. By identifying what went wrong with new digital technologies that might have contributed to high-profile accidents in the car and aircraft industries (e.g., Tesla self-driving cars and the Boeing 737 Max), it is possible to identify similar risks in the water sector, learn from them, and prevent future failures. The key findings show that: ① Automation will require “humans in the loop”; ② human operators must be fully aware of the technology and trained to use it; ③ fallback manual intervention should be available in case of technology malfunctioning; ④ while redundant sensors may be costly, they reduce the risks due to erroneous sensor readings; ⑤ cybersecurity risks must be considered; and ⑥ ethics issues have to be considered, given the increasing automation and interconnectedness of water systems. These findings also point to major research areas related to digital transformation in the water sector.

Unlike judgments made in private, advice contexts invoke strategic social concerns that might increase overconfidence in advice. Many scholars have assumed that overconfident advice emerges as an adaptive response to advice seekers' preference for confident advice and failure to punish overconfidence. However, another possibility is that advisors robustly display overconfidence as a self-promotion tactic-even when it is punished by others. Across four experiments and a survey of advice professionals, the current research finds support for this account. First, it shows that advisors express more overconfidence than private decision-makers. This pattern held even after advice recipients punished advisors for their overconfidence. Second, it identifies the underlying motivations of advisors' overconfidence. Advisors' overconfidence was not driven by self-deception or a sincere desire to be helpful. Instead, it reflected strategic self-promotion. Relative to the overconfidence revealed by their private beliefs, advisors purposely increased their overconfidence while broadcasting judgments when (a) it was salient that others would assess their competence and (b) looking competent served their self-interest. (PsycInfo Database Record (c) 2022 APA, all rights reserved).

This study examines whether capital structure determinations by Indonesian publicly listed firms (Tbks) are influenced by the behavioural biases of overconfidence and optimism, with the underlying rationality frameworks being framed by relevant financial information and impacted by decision-makers’ demographic attributes. Data were obtained from survey respondents and statistically analysed using partial least squares structural equation modelling to identify the indicators of causative dynamics within the hypothesised relationships. Sampled Tbks’ management (CEOs/CFOs) displayed the inherent behavioural traits of overconfidence and optimism in their capital structure determinations. However, such behavioural variables were not statistically proven to significantly influence capital structure decision-making and, hence, were not validated as capital structure determinants. The pecking order framework was revealed to have a significant framing effect on capital structure decision-making by sampled managers. Sampled managers’ demographic attributes and backgrounds were found to be capital structure determinants but did not have a mediating or moderating influence on the modelled relationship between behavioural variables and capital structure.

In this paper, we study the impacts of overconfidence in a competitive retailer setting of green fashion. We model a green fashion supply chain comprising one unbiased manufacturer and two biased retailers, to explore how overconfidence affects greenness level of fashion products and expected profit of retailers. An overconfident retailer has a cognitive bias in which it believes consumers are more sensitive to greenness of fashion products than it really is. Our findings show that the competition between two retailers discourages greenness level of fashion products, while overconfidence can provide a counterbalance to the negative impact caused by competition. We also find, a retailer’s overconfidence is not only conducive to the greenness level of its own fashion products, but also can benefit to its rival. Moreover, it shows a low level of overconfidence can be a comparative advantage of the retailer’s profit. Even though one of the retailers is unbiased and has an advantage of information, it can still earn less than its overconfident rival.

Confidence is often seen as an important determinant of success. However, empirical evidence regarding the causal effect of confidence on choices is sparse. Using a stylized laboratory experiment, we examine the effect of an increase in confidence on two important labor market choices: (i) the amount of ability-contingent earnings risk to take on, and (ii) the subsequent effort choice. We find that increased confidence leads subjects to take on more ability-contingent earnings risk. However, effort levels are unaffected. Overall, the upward shift in confidence is detrimental for low-ability workers as a result of high baseline levels of confidence. Confidence is often seen as an important determinant of success. However, empirical evidence regarding the causal effect of confidence on choices is sparse. Using a stylized laboratory experiment, we examine the effect of an increase in confidence on two important labor market choices: (i) the amount of ability-contingent earnings risk to take on, and (ii) the subsequent effort choice. We find that increased confidence leads subjects to take on more ability-contingent earnings risk. However, effort levels are unaffected. Overall, the upward shift in confidence is detrimental for low-ability workers as a result of high baseline levels of confidence.

Purpose The advocates of behavioural finance have denounced the existing literature on investors’ rationality in the decision-making process and questioned the existence of efficient markets and rational investors. Although diversified research has been conducted in the area of behavioural finance, yet there is a need of further explorations into the field as the available knowledge base is confined to one or a few behavioural biases confronted by investors while making investment decisions. Hence, this study aims to develop a comprehensive, reliable and valid scale to measure the behavioural biases affecting investors’ decision-making process. Design/methodology/approach To develop a comprehensive, reliable and valid scale for measuring the behavioural biases affecting investors’ decision-making process, rigorous multi-stage scale development methodology has been followed. Stage one started with an extensive review of the literature followed by interviews from experienced stockbrokers to clarify construct and getting novel insights about dimensions of behavioural biases. In stage two, 52 items measuring the dimensions of behavioural biases were generated and got evaluated from panel of judges. Pilot testing was done in the third stage which gave a set of 39 items. Finally, in fourth stage, data were collected from 332 individual equity investors on a 7-point Likert scale using the snowball sampling technique. Findings The results of the study highlighted that behavioural biases is a multidimensional phenomenon that significantly affects investors’ decisions and has different dimensions, namely, Availability Bias, Representativeness Bias, Overconfidence Bias, Market Factors, Herding, Anchoring, Mental Accounting, Regret Aversion, Gamblers’ Fallacy and Loss Aversion. The present research has developed a comprehensive, reliable and valid scale for measuring behavioural biases affecting equity investors’ decision-making process. Originality/value Behavioural finance is an emerging area in the field of research particularly in the Indian context which needs further exploration. The present research concentrates on rendering an empirically tested scale to the researchers for measuring the behavioural biases and its impact on investor’s decision-making. Such an instrument can contribute to making progress in the area of behavioural finance and other research studies may also find it useful to achieve their goals.

Need for closure (NFC) is a cognitive bias that has been implicated in the pathogenesis of delusions. A general population sample (N = 1465) was dichotomized into high versus low schizotypal participants and matched based on core social demographic characteristics (each n = 98). For the first time, we aimed at capturing NFC subjectively (with the NFC Scale) and objectively with a new experimental paradigm, the Ambiguous Movie Scene Task. In this task, participants viewed video scenes with either open or closed endings (i.e., high or low ambiguity) and rated their (emotional) reactions to the clips. Open endings were expected to lead to more frustration (i.e., due to increased need for closure) and to induce greater eagerness to learn about the possible resolution among those high on positive schizotypy. High schizotypal individuals displayed higher scores on the NFC Scale than low schizotypal individuals. Contrary to our expectations, high schizotypal participants did not recognize video scenes with open endings as ambiguous and were less eager to learn about a possible resolution than low schizotypal individuals. In the Ambiguous Movie Scene Task, high schizotypal individuals showed evidence of a jumping to conclusions bias rather than frustration over unresolved storylines. We found an overall stronger emotional response in schizotypal participants and overconfidence in their judgments. The NFC Scale and selected scores of the new task correlated moderately. The study corroborates earlier evidence for a dissociation between objective and subjective biases in the psychosis spectrum.

Overconfident CEOs speed up (slow down) adjusting firm leverage if it is above (below) target leverage. In addition, overconfident CEOs speed up (slow down) adjusting firm cash holdings if it is below (above) the optimal balance. Our results imply overconfident CEOs are associated with high cash holdings and low leverage. Additional tests suggest that the results do not imply cash and (negative) debt are substitutable. We also find overconfident CEOs sometimes reduce firm leverage unexpectedly. The observation is consistent with the view that overconfident CEOs are strong-willed individuals who dislike being monitored. Thus, besides the tendency to overestimate their ability and underestimate risk, overconfident CEOs are affected by additional aspects of their behavioral traits in decision making.

The purpose of this research is to identify the factors that support mutual funds investment decisions through overconfidence, risk perception, loss aversion, availability, and herding variables on the investment decisions of the residents of Batam City. Data were collected through questionnaires and processed using multiple linear regression. The results of testing and processing research data show that overconfidence, loss aversion, and herding significantly positively affect investment decisions, while risk perception and availability do not affect investment decisions.

The process of news consumption has undergone great changes over the past decade: Information is now available in an ever-increasing amount from a plethora of sources. Recent work suggests that most people would favor algorithmic solutions over human editors. This stands in contrast to public and scholarly debate about the pitfalls of algorithmic news selection—i.e., the so-called “filter bubbles.” This study therefore investigates reasons and motivations which might lead people to prefer algorithmic gatekeepers over human ones. We expect that people have more algorithmic appreciation when consuming news to pass time, entertain oneself, or out of escapism than when using news to keep up-to-date with politics (H1). Secondly, we hypothesize the extent to which people are confident in their own cognitive abilities to moderate that relationship: When people are overconfident in their own capabilities to estimate the relevance of information, they are more likely to have higher levels of algorithmic appreciation, due to the third person effect (H2). For testing those two pre-registered hypotheses, we conducted an online survey with a sample of 268 US participants and replicated our study using a sample of 384 Dutch participants. The results show that the first hypothesis cannot be supported by our data. However, a positive interaction between overconfidence and algorithmic appreciation for the gratification of surveillance (i.e., gaining information about the world, society, and politics) was found in both samples. Thereby, our study contributes to our understanding of the underlying reasons people have for choosing different forms of gatekeeping when selecting news.

PurposeThe purpose of this research is to examine the effect of heuristic biases on investment decisions through multiple mediation mechanisms of risk tolerance and financial literacy in the Tanzanian stock market.Design/methodology/approachA sample of 316 individual investors in the Tanzanian stock market was obtained through questionnaires. The data were analyzed using structural equation modeling (SEM).FindingsThe findings show that financial literacy mediates insignificantly the effects of overconfidence, availability, anchoring and representativeness heuristics on investment decisions. Further, financial literacy does not influence the effect of risk tolerance and investment decisions. Risk tolerance is confirmed as a positive mediator of overconfidence, availability, anchoring and representativeness heuristics in investment decisions. Also, the study shows that overconfidence exerts a stronger influence on investment decisions, followed by availability, representativeness, risk tolerance, anchoring and financial literacy.Research limitations/implicationsThe study deals with real investors. Therefore, it uses fewer items to measure the constructs in order to avoid respondent bias. Further research could examine the effects of heuristic biases on investment decisions by adding or modifying the items of particular constructs and studying institutional investors.Practical implicationsThe findings can help individual investors to analyze and evaluate their behavior toward stock selection. Securities institutions can use this research to understand investors' behavior, evaluate future market trends and provide advice to the investors.Originality/valuePrevious studies have examined the impact of heuristics on the investment decisions of individual investors. The unique empirical analysis developed in this paper is that it examines the multiple mediation mechanisms of risk tolerance and financial literacy with respect to heuristic biases and investment decisions in the Tanzanian stock market.

This paper presents a bibliometric analysis of relevant publications in the field of behavioral finance and behavioral accounting. The analysis shows that the emerging themes of research in recent years in behavioral finance is on investors’ sentiment, social media, investors’ attention, and financial literacy. In the field of behavioral accounting, biases such as  overconfidence, framing effects or cognitive constraints on information processing, have been explored in greater detail. Other than cognitive biases, this field includes studies such as behavioral tax, organizational ecology, and performance evaluative style of organization, among others. Interestingly, our analysis suggests that research in behavioral accounting is comparatively underdeveloped than research in behavioral finance. This bibliometric analysis has been extended by network analysis using, “Visualization of similarities, (VOS) viewer” software. Using the themes generated here the direction for future scope of research work has been discussed.

Background: The positive relationship between managerial overconfidence and performance implies that overconfident managers overestimate their ability to create value and improve their firm’s performance, which also lead to overestimate their own firms returns by taking over other firms. Purpose: The study examines relationship between managerial overconfidence, CEO compensation, and performance of sharia compliant firms and non-sharia compliant firms for 207 GCC listed firms from 2010 to 2014. Methodology: The study sample comprised of 207 firms for the main empirical analysis. The data used in this study were collected from GCC stock exchange data-base and firms financial report provided by website argaam.com between 2010 and 2018. Findings: The study found that managerial overconfidence is positively and significantly related to firm performance. CEO compensation and managerial overconfidence is also associated positively with sharia–compliant firms’ performance. The findings supported first hypothesis that managerial overconfidence leads to better firms’ performance. Originality: The study has revealed a positive impact of sharia compliant firms’ managerial overconfidence on firm performance. Furthermore, the effect of CEO compensation is favorable in sharia compliant firms.

This paper makes a novel contribution by examining the puzzle of one Southeast Asian nation, Myanmar, and its dramatic shift of ‘fortune’ in its international status and the domestic consequences o...

Perilaku keputusan investasi mulai menarik perhatian akademisi internasional. Penelitian ini dilakukan untuk mengetahui pengaruh behavioral finance dengan menerapkan variabel overconfidence, representativeness, mental accounting, loss aversion dan herding terhadap keputusan investasi. Jumlah sampel yang dikumpulkan dan digunakan dalam penelitian berjumlah 203 responden di Kota Batam dan dianalisis menggunakan metode regresi linier berganda. Hasil penelitian menunjukkan bahwa overconfidence, mental accounting, dan herding berpengaruh positif signifikan terhadap keputusan investasi, sedangkan variabel representativeness dan loss aversion tidak berpengaruh terhadap keputusan investasi.

BACKGROUND The conduct of research by clinicians is vital to maintain evidence-based practice and currency of clinician knowledge. However, the ability to conduct valid research is contingent on several factors including the knowledge of research ethics guidelines applicable within the researcher's location. AIMS To compare the actual and perceived knowledge of research ethics guidelines in a sample of healthcare clinicians in a public health service. METHODS A prospective cross-sectional design utilising an anonymous online survey. RESULTS Of the 432 valid responses, 8% were totally well calibrated on perceived and actual knowledge. A further 9% were totally miscalibrated on all items. The remaining 83% of respondents were variously miscalibrated on 1-4 items. The majority of miscalibrated responses represented overconfidence. CONCLUSIONS Clinicians are not as knowledgeable as they think about research ethics. This has implications for help-seeking behaviours within this population and highlights challenges for stakeholders in the provision of research support and education.

This study aims to examine the factors that influence investment decisions in the capital market for accounting students at the Faculty of Economics and Business, Universitas Muhammadiyah Metro. The factors that influence investment decisions in the Capital Market are financial literacy, overconfidence, minimum capital, understanding of investment, and risks. This study uses a quantitative approach. The population in this study were 313 respondents. In this study, the sample technique used is nonprobability sampling with purposive sampling technique so that the sample obtained was 93 respondents. The data in this study were analysed using the assistance of the IBM SPSS version 20 program by testing multiple linear regression analysis. The results of this study indicate that financial literacy, overconfidence and minimal capital partially affect investment decisions in the capital market. Meanwhile, understanding investment and risk partially has no effect on investment decisions in the capital market. As well as financial literacy, overconfidence, minimal capital, understanding of investment and risk simultaneously affect investment decisions in the capital market.

Purpose This study aims to explore the behavioral patterns of entrepreneurs, their cognitive styles and personality characteristics that can lead to a self-destructive chain of events during the transition from a fledgling business to one capable of long-term, profitable growth. This study adopts the self-regulation attitude theory to uncover the reasons for premature start-up scaling, which will help founders to study on their cognitive biases, emotions and behaviors and make efforts to do what does not come naturally to them. Design/methodology/approach The respondents for this qualitative study were selected from a group of entrepreneurs with extensive experience with technology start-ups that have either failed or succeeded during their development stages. In-depth semi-structured interviews were conducted with eight participants, who were selected through snowball sampling, on the theme of understanding “How do premature scaling mistakes happen?”. Thematic analysis was used to unearth common themes. Findings The results of this study identified the following themes, “comparison,” “emotional over-reaction,” “impatience,” “mistaken customer priorities,” “overestimation” and “overconfidence,” which eventually leads to premature scaling. The underlying decision-making heuristics of entrepreneurs can be identified as engulfed in different cognitive biases and emotions resulting in negative behavioral patterns, as in the case of premature scaling. Of the six themes, “comparison,” “mistaken customer priorities,” “overestimation” and “overconfidence relates to cognitive bias” and “emotional over-reaction” and “impatience” relate to emotional factors. Research limitations/implications The study was made possible with the support of the voluntary participants chosen by purposive and snowballing data sampling. The interviewee and interviewer biases could have also crept in as part of this qualitative approach. The study pertains only to start-ups in the information technology sector and further studies need to be done to generalize the results across industries as well. Practical implications This early-stage underestimation of unexpected obstacles in the entrepreneurship journey necessitates a focus on the entrepreneur too, as much as the concept. In these hectic and fast-paced circumstances, aspiring entrepreneurs must be taught how to deal objectively with themselves and others, as well as think strategically. Leaders who scale do so because they take purposeful measures to overcome their weaknesses through self-discipline, soliciting advice from others and using their right to change their attitude and points of view. Originality/value The study frames the new approach into the entrepreneurial literature, linking it to self-regulation attitude theory and adds to the nascent literature on neuroentrepreneurship which discuss entrepreneurial cognition, decision-making, and entrepreneurial behavior. This study attempted to explore the reasons behind the premature scaling of startups on an individual level. This study is pioneering in exploring the cognitive factors underlying an entrepreneur’s decision that results in premature scaling. This study provides insights for academicians, entrepreneurs and policymakers and helps understand the cognitive journey that leads to premature scaling.

In this article, we provide a brief review of recent computational modelling studies of substance use disorders (SUDs), with a focus on work published within the last 5 years. While reinforcement learning (RL) approaches are most prominent in recent studies, we also review work from other perspectives that focus on Bayesian (active) inference and perceptual processing. Recent work in RL shows evidence that goal-directed (model-based) planning processes are impaired in SUDs, leading to impulsive, habitual decision processes focused on short-term reward despite long-term negative consequences. Bayesian approaches offer a complementary perspective, suggesting that drug-induced overconfidence in prior expectations prevents substance users from appropriately updating their beliefs in the face of negative outcomes. Recent neurocomputational studies have shown promise in differentiating those who will and will not relapse. Computational modelling has made progress in identifying specific prospective decision-making processes that are impaired in SUDs, but further research is necessary before these approaches can directly inform medical practice on an individualized level.

Does CEO overconfidence help explain pay inequalities in top management teams? Tournament literature argues that pay gaps between different executive echelons increase competition among executives in the goal to replace the incumbent CEO and by so doing incentivize all top management team members to provide more effort. The increase in incentives can in turn lead to firm-level performance improvement especially in corporations where agency conflicts are severe. However, entrenchment seeking CEOs can be reluctant to this kind of incentivizing mechanisms. In this paper, we model such a context and show how overconfident CEOs are more likely to administer tournament like incentives than realistic CEOs. Hence, we describe a novel and under-explored way in which CEO overconfidence can be beneficial to shareholders.

Stock markets worldwide have witnessed high volatility during the year 2020 owing to the eruption of Covid-19. Due to the world’s unprecedented economic challenges, this study could potentially guide financial advisors and individual investors in dealing with pandemics. An association between investors’ perception toward the intensity of Covid-19 and heuristic biases is analyzed using the responses of 290 stock investors of National Capital Region (NCR), India. The data are validated through Cronbach’s alpha, and the model fit is analyzed using EFA. Confirmatory factor analysis (CFA) is employed to investigate the relationship between Covid-19 and heuristic biases. Covid-19 does not have any influence on the overconfidence of investors. A significant positive relationship is found between Covid-19 and the remaining three heuristics, i.e., availability, anchoring, and representativeness. The present study analyzes the association between Covid-19 and specific investors’ bias only and should not be interpreted for causality. The study has the potential to guide investors in understanding the errors they are making while investing during the pandemic and the ways to deal with them. The study could provide insights to the financial advisors in understanding their customers. The implications of the study may include inputs of the errors committed by them during the pandemic. Despite the fact that an enormous amount of literature exists in the field of investors’ sentiment, a scarcity of literature is available that measures the relationship between heuristic biases and the perceived impact of the pandemic. The current study attempts to fill this gap in the literature.

The aim of this study is to examine the factors affecting the trading volume of Borsa Istanbul within the framework of the overconfidence bias, one of the behavioral finance theories. For this purpose, stock market trading volume, BIST 100 index closing values, BIST 100 index historical volatility and credit default swaps (CDS) premium variables for the period covering the years 2010 – 2019 were used in the study. During the analysis process, firstly ADF, PP and KPSS unit root tests were performed and then Granger causality analysis was applied. The findings showed that the stock index and CDS premiums are the Granger cause of the trading volume, but volatility is not the Granger cause of the trading volume. The obtained findings were compared with the results in the literature and interpreted. It is interpreted that linking the earnings obtained with the increase in the stock market index to individual abilities, predictions and achievements may cause a tendency to overconfidence bias in investors. In addition, it is thought that this overconfidence may cause new transactions and thus an increase in the transaction volume. CDS premiums, on the other hand, give positive and negative signals about the future and are accepted as a risk indicator. It can be evaluated that investor who perceive risk as an opportunity and have a tendency to overconfidence bias will try to evaluate this situation with various positions and transactions and increase market trading volume. However, the fact that volatility is not the cause of trading volume can be explained by the perception that investors with high returns pay less attention to volatility and that their own forecasts are better than other investors' forecasting power. As a result, volatility is not effect the trading activity and investors focus on the value they have determined within the framework of overconfidence bias., Bu çalışmanın amacı, Borsa İstanbul işlem hacmini etkileyen unsurların davranışsal finans teorilerinden aşırı güven eğilimi çerçevesinde incelenmesidir. Bu amaçla çalışmada, 2010 – 2019 yıllarını kapsayan dönem için borsa işlem hacmi, BİST 100 endeksi kapanış değerleri, BİST 100 endeksi tarihsel volatilite değerleri ve kredi temerrüt swapları (CDS) primi değişkenleri kullanılmıştır. Analiz sürecinde öncelikle ADF, PP ve KPSS birim kök testleri yapılmış, ardından Granger nedensellik analizi gerçekleştirilmiştir. Sonuçta, borsa endeksi ve CDS primlerinin işlem hacminin nedeni olduğu, ancak volatilitenin işlem hacminin nedeni olmadığı bulgulanmıştır. Elde edilen bulgular literatürde yer alan sonuçlar ile karşılaştırılmış ve yorumlanmıştır. Buna göre, borsa endeksinin artmasıyla birlikte elde edilen kazancın bireysel yeteneklere, tahminlere ve başarılara bağlanmasının, yatırımcılarda aşırı güven eğilimine neden olabileceği yorumu yapılmaktadır. Ayrıca söz konusu aşırı güvenin yeni işlemlere ve dolayısıyla işlem hacminde artışlara sebebiyet verebileceği düşünülmektedir. CDS primleri ise geleceğe dair pozitif ve negatif sinyaller vermekte ve bir risk göstergesi olarak kabul edilmektedir. Riski fırsat olarak algılayan, aşırı güven eğilimine sahip yatırımcıların çeşitli pozisyonlar ve işlemler ile bu durumu değerlendirmeye çalışacağı ve işlem hacmini artıracağı değerlendirmesi yapılabilir. Bununla birlikte volatilitenin işlem hacminin nedeni olmaması, yüksek getiri elde eden yatırımcıların volatiliteyi daha az dikkate aldığı ve kendi tahminlerinin diğer yatırımcıların tahmin gücünden daha iyi olduğu algısıyla açıklanabilir. Sonuç olarak, volatilite alım satım faaliyetini etkilememekte ve yatırımcılar aşırı güven eğilimi çerçevesinde belirledikleri değere odaklanmaktadır.

Using data from the 2011 and 2015 China Health and Retirement Longitudinal Study, this paper analyzes the relation between health perception biases and risky health behaviours among adults aged 45 ...

Corporate venture capital (CVC) has consistently proven its importance for firm innovation, growth, and other strategic goals. However, research on the antecedents of CVC is still scarce. Drawing o...

International audience; This study reports on the impact of exposure to tax dilemmas on tax morale. We focus on young adults in their “impressionable years” and with little or no previous tax exposure in order to estimate the impact of actual (albeit experimental) exposure to tax dilemmas on their self-declared tax morale. First, we ascertain the participants’ (N = 385), representation and attitudes towards tax, and second, we observe the impact of facing tax decisions on their present and future level of tax compliance. This allows us to investigate, in the realm of taxation, the generic question of knowing how one’s history (and one’s decisions) influences one’s ethical representations and attitude. Although of less external validity than studies using naturally occurring events or historical periods, the use of an experimental simulation enables us to investigate the three different dimensions that could shape people’s personal history: acting, experiencing and observing. Thanks to an interactive and systemic approach, participants are invited to make decisions in a tax context, to experience tax “events” and are given the opportunity to observe both their own behavior, that of others as well as the consequences of those actions, and repeat and test those three different steps several times. We find that the simulation tends to reduce honesty and ethical concerns with respect to taxation, a decrease in tax morale. This reduction seems to be driven by those subjects who were actually facing a tax dilemma and have to make a compliance decision. Other subjects, only observing or experiencing the effects of low tax compliance, are only marginally affected. One possible interpretation is that individuals have an initial overconfidence in their propensity to tax compliance and tax morale, which is challenged by their own decisions in typical dilemmas.

The study of political decision-making cannot exclude the actors involved in the process. Neither can it disregard the interplay between decision-makers and political institution where they operate. This article aims to explain how perception of survival affects decision-making by focusing on leaders, specifically by analysing Benigno S. Aquino III’s leadership (2010–2016). Built on political psychology, I will show that motivation to maintain power may bias leaders’ reasoning leading to suboptimal decision. Accountability can help leaders mitigate bias, or de-bias, by stimulating their use of cognitive complexity. But the same effort may backfire and make leaders resort to heuristics instead. Where leaders end up in the cognitive spectrum depends on the types of audiences to whom they feel accountable: core (the ruling elites and loyal voters) and external (the opposition and its supporters) audiences. Preoccupation with core audiences can make leaders downplay the opposition challenge. Furthermore, leaders’ perceived understanding of their support base may be erroneous. The result is overconfidence in their perception of survival. I argue that President Aquino’s misperception of survival was rooted in his belief that (1) Filipinos would like to have his legacy continued and that (2) his popularity would help his successor Manuel Araneta Roxas II win the 2016 presidential race. This overconfidence turned out to be detrimental. Roxas’s electoral loss to Rodrigo Duterte put an end to the Daang Matuwid, President Aquino’s good governance platform.

This study aims to examine the influence of demography, social media, risk attitude, and overconfidence on the financial literacy of users of social media in Surabaya. The sample used in this study amounted to 300 respondents. Data were collected using a online questionnaire via Google Form. The data analysis method used in this study is PLS. The analysis test results show that there is an effect of demography, social media, risk attitude, and overconfidence on users' financial literacy in Surabaya.

This study analyzes the relationship between gender and risk aversion and overconfidence in making financial asset investment decisions for investors in Surabaya. The sample in this study amounted to 179 investors. Data were collected using a questionnaire. Methods of data analysis were performed using cross-tabulations and chi-square. This analysis shows that gender has a significant relationship with risk aversion and overconfidence in making financial asset investment decisions.

We assess information embedded in the difference between the reported book income and the taxable income (the book-tax difference, BTD hereafter) from the debtholders’ point of view. Using bank loan contracts of the U.S. publicly traded companies over years 2001–2017, we find that firms with larger book-tax differences pay higher interest for bank loans than do firms with smaller book-tax differences. Moreover, we find that banks reduce the use of financial covenants while increasing the use of general covenants for borrowers that have larger book-tax differences. In addition, banks are more likely to shorten loan maturity and require their loans to be collateralized for borrowers with larger book-tax differences. Furthermore, we find that the effects of BTDs on loan contracting are stronger if the CEOs of the borrowers are overconfident. Taken together, our findings suggest that larger book-tax differences increase a bank’s concerns regarding a borrower’s information risk and default risk. Thus, banks tend to take price and non-price protection against borrowers which have large BTDs.

Obtaining quantitative survey responses that are both accurate and informative is crucial to a wide range of fields. Traditional and ubiquitous response formats such as Likert and Visual Analogue Scales require condensation of responses into discrete point values - but sometimes a range of options may better represent the correct answer. In this paper, we propose an efficient interval-valued response mode, whereby responses are made by marking an ellipse along a continuous scale. We discuss its potential to capture and quantify valuable information that would be lost using conventional approaches, while preserving a high degree of response-efficiency. The information captured by the response interval may represent a possible response range - i.e., a conjunctive set, such as the real numbers between three and six. Alternatively, it may reflect uncertainty in respect to a distinct response - i.e., a disjunctive set, such as a confidence interval. We then report a validation study, utilizing our recently introduced open-source software (DECSYS) to explore how interval-valued survey responses reflect experimental manipulations of several factors hypothesised to influence interval width, across multiple contexts. Results consistently indicate that respondents used interval widths effectively, and subjective participant feedback was also positive. We present this as initial empirical evidence for the efficacy and value of interval-valued response capture. Interestingly, our results also provide insight into respondents' reasoning about the different aforementioned types of intervals - we replicate a tendency towards overconfidence for those representing epistemic uncertainty (i.e., disjunctive sets), but find intervals representing inherent range (i.e., conjunctive sets) to be well-calibrated., Comment: 59 pages, 12 figures, submitted to Behavior Research Methods

Non-ability-based confidence is confidence in one’s ability that is not calibrated to actual ability. Here, we examine what psychological factors are associated with possessing more or less confidence relative to one’s ability and to what extent genetic and environmental processes contribute to these links. Using data from the Texas Twin Project ( N = 1,588 participants, aged 7–15 years), we apply a latent variable residual approach to calculate non-ability-based confidence as self-rated confidence net of ability on standardized cognitive tests. Non-ability-based confidence was modestly heritable (9%–28%) and strongly positively correlated with the need for cognition, mastery goal orientation, grit, openness, and emotional stability. These correlations were partly mediated by genetic factors (57% of the association on average). This widespread pattern of associations between non-ability-based confidence and several other measures of thinking, feeling, and acting suggest that non-ability-based confidence can be conceptualized as a personality attribute.

PurposeThis paper attempts to investigate the influence of psychological biases on saving decision-making of bank customers in Ghana.Design/methodology/approachIt employs weighted least squares regression to test the effect of psychological biases on savings decisions of bank customers.FindingsThe findings show that all the nine psychological biases, namely mental accounting, availability, loss aversion, representativeness, anchoring, overconfidence, status quo, framing effect and disposition effect employed for the study have a significant influence on saving decision of bank customers. The results depict that psychological biases are entrenched in the saving pattern of bank customers in Ghana.Practical implicationsFor policy purposes, the study recommends that bank customers need to enhance their knowledge of psychological biases in order to improve their gains from savings, and not to fall prey to these prejudices. The satisfied customer is a dependable source of bank viability and survival.Originality/valueTo the best of the knowledge of the author, this study provides the first empirical evidence of the influence of psychological biases on saving decisions of bank customers in Ghana. The findings of this study will enhance knowledge on the influence of psychological biases on individual decision-making and will accentuate the fact that the individual is not an entirely rational being.

The present paper is designed to examine the extent of the Chief Executive Officer’s (CEO) behavioral impact on the bank risk-taking venture. The sample involves a set of 540 banks, observed over a longitudinal panel data set (2007-2019). A multiple linear-regression technique has been applied. The attained results prove to highlight that when CEOs seem to enjoy a great deal of overconfidence, they are more likely to influence the board’s decision-making to their proper risk-reducing advantage. The greater the CEO dominance is, the more decreased the bank specific risk turns out to be, given the significantly positive association of CEO dominance with the risk-taking procedure. This paper's results have implication for banks and policymakers looking to promote risk-taking. This paper could be useful to shareholders as they aim to recruit the most gifted CEOs with the relevant set of competences in order to meet shareholders' goals and enhance bank competitiveness. JEL Codes - G23, G32, G41

The main aim of this paper was to examine the consistency of experts (N = 71) in evaluation in high-stakes real-life decision-making, and how their consistency relates to other psychological constructs such as cognitive reflection and overconfidence. A pool of top Slovak experts was assembled, and the AHP method for eliciting policy priorities was applied. Moreover, the cognitive reflection and overconfidence of experts were measured. The consistency of experts tended to improve over time and this improvement occurred also in exercises with increased cognitive demand. Improved consistency may have resulted both from the learning effect and from better comprehension of one’s preferences. However, there was no correlation between the consistency of experts and their cognitive reflection or overconfidence. The results suggest that for technological and economic development of any state it is beneficial for real experts to decide these issues. However, experts are not perfect and free from mistakes; therefore, attention should be paid to the selection process of future experts and their learning environment.

Research Question: Does CEO overconfidence have an effect on the level of real earnings management (REM) in the mergers and acquisitions (M&A) context? Motivation: the relationship between the overconfident manager’s behavior and REM in the context of M&A has gained momentum in the accounting and financial studies. In this context, the present work will enrich the literature on behavioral finance and REM in the M&A context. Idea: This study was to investigate the effect of overconfidence as part of the manager’s cognitive characteristics on the level of REM in M&A context. Data: The data were collected from the annual reports of the companies to build an M&A database and the Thomson Reuters database for the other variables. This study used panel data analysis on a sample of 280 M&A deals of American listed firms indexed in the S&P500 between 2012 and 2018. The total sample was divided into two subgroups according to whether the companies are involved in M&A transactions (test sample) or not (control sample). Tools: To test study’s hypotheses, we applied multiple regression analysis based on panel data using the annual reports and Thomson Reuters database. Findings: The main finding of this study is related to the positive effect of overconfident manager’s behavior on REM in the M&A context. The results show that overconfident managers of acquiring and target companies manage their results upwards using REM. Contribution: The present study provides a new addition to the prior literature by exploring the contributions of behavioral finance in studying the reality and perspectives of the real earnings management in the presence of an overconfident manager’s behavior in the M&A market.

This studyis intendedto analyze the effect of herding behavior and overconfidence in encouraging investmentdecision-makingby investors on the Indonesia Stock Exchange in the Jakarta area.The population ofthis research is investors who invest in investment instruments listed on the Indonesia Stock Exchange in the Jakarta area with an unknown population, and the number of samples in this study is 100 investors. Data analysis in this study used an alternative method of Structural Equation Modeling (SEM) withWrap PLS5.0 data processing tools. The findings of thisstudy isherding has a positive and significant effect on investment decisions by investors in the Jakarta area. Overconfidence has a positive and significant effect on investment decisions by investors in the Jakarta area. This means that the increasing herding and overconfidence of investors can drive the investor’s decisions making in the Jakarta area.

Financial knowledge is often referred to as the key to improving one’s financial decisions. Because of the evident racial/ethnic disparities in wealth, income, and financial wellbeing, it is important to understand the differences in the level of financial knowledge as well. This study examined whether there is a racial/ethnic gap and to understand what might account for potential differences with OLS regression and Blinder-Oaxaca decomposition analyses. The results from the 2018 National Financial Capability Study, with the analytic sample of 21,038 observations showed significant racial/ethnic gaps in objective and subjective financial knowledge, as well as overconfidence in financial knowledge. The level of overconfidence was greatest among Black respondents, followed by Hispanic, White, and Asian/Other. According to the decomposition analyses’ results, individual characteristics explained the majority of the gap in Hispanic-White and Asian/Other-White overconfidence. Other key factors that helped explain the disparities in financial knowledge measures included sociodemographic variables, such as age, marital status, education, and occupation, and financial variables, such as income, homeownership, and financial hardship. With a deeper understanding of the factors related to racial/ethnic differences, policymakers and educators could improve their strategies to enhance financial knowledge and narrow the knowledge and wealth gap among racial/ethnic groups.

PurposeThis paper examines the effect of overconfident yield forecasting (optimism bias) on crop insurance coverage level choices across both yield and revenue insurance.Design/methodology/approachThis study simulates a representative producer’s preferred coverage level for both yield and revenue insurance under three potential models of decision-making and four potential manifestations of overconfident yield forecasting. The study then uses this framework to examine how coverage level choices change as overconfidence increases (decreases).FindingsAs overconfidence increases, producers prefer lower levels of crop insurance coverage than they would otherwise prefer, with extreme overconfidence inducing farmers to buy no insurance at all. While overconfidence affects cross-coverage demand for revenue and yield insurance similarly, this effect is more pronounced for yield insurance. Cross-coverage level demand for revenue insurance is relatively stable across changes in the correlation between prices and yields.Practical implicationsThis research has important implications for crop insurance subsidy design and crop insurance demand modeling.Originality/valueThere is a growing body of literature suggesting that producers are overconfident with regard to their future yield risk and that this bias reduces their willingness to pay for risk management tools such as crop insurance. This is the first study to look at how such overconfidence affects cross-coverage level demand for crop insurance.

Purpose This paper aims to examine the relation between managerial ability and stock price crash risk, conditional on managerial overconfidence. In addition, conditional on managerial overconfidence, the authors investigate the effect of managerial ability on firms’ choice of bad news hoarding channels, which result in a stock price crash. Design/methodology/approach Using a sample of 24,289 firm-years from companies listed on Compustat and CRSP from 1994 to 2018, the authors conduct panel regression analysis. Findings The authors find that managerial ability is positively associated with stock price crash risk only when managerial overconfidence is high. Furthermore, the authors find that managerial ability seems to exacerbate (attenuate) the bad news withholding by the overconfident managers using the earnings guidance (earnings management) channel. The authors find limited evidence that high-ability managers are likely to withhold bad news through the overinvestment channel and “other channels” when managers are overconfident. Finally, the authors find that the joint effect of managerial overconfidence and managerial ability on firms’ crash risk is more pronounced when there is a material weakness in firms’ internal controls, high investor belief heterogeneity and high information asymmetry. However, this effect appears to dissipate during the recent financial crisis in 2008. Originality/value This research reveals that managerial ability is costly to firms by engendering bad news hoardings and stock price crash risk when managers are overconfident. It also sheds light on how managerial overconfidence and managerial ability affect managers’ choice of bad news withholding channels and stock price crash risk. Finally, the paper is of practical value to the board of directors in selecting the prospective executives.