Financial competence, overconfidence, and trusting investments: Results from an experiment

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 ret...

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Bibliographic Details
Published in:Journal of economics and finance 2016-07, Vol.40 (3), p.590-606
Main Authors: McCannon, Bryan C., Asaad, Colleen Tokar, Wilson, Mark
Format: Article
Language:English
Subjects:
Agreements
Behavior
Decision making
Economic models
Economics
Economics and Finance
Enforcement
Expected utility
Experiments
Finance
Financial literacy
Investments
Knowledge
Macroeconomics/Monetary Economics//Financial Economics
Market prices
Preferences
Skills
Social norms
Studies
Third party
Trust
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Summary: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 and overconfidence in one’s knowledge. 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.
ISSN:1055-0925
1938-9744
DOI:10.1007/s12197-015-9328-4