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.
|Number of pages||6|
|Journal||Journal of Socio-Economics|
|State||Published - Jan 2010|
- Market data
- Probability weighting functions
ASJC Scopus subject areas
- Economics and Econometrics