project : the influence of overconfidence

The objectives of the research are as follows:

-To find out whether there is relationship among past success, prediction ability and
over confidence.
-To analyze the influence of experience on overconfidence.

The definition and measurement of over confidence
Over confidence originates from the psychological research area. The psychologists
defined it as a special format of mistakes or bias, that is people tend to over-estimate
the probability of an event (Hardies et al., 2012). From then on over confidence has
been found in a series of psychological tests. In psychology, people who are over
confident will show deviation from the calibration and they will also have average
effect, illusion of control and over optimism. The average effect refers to that people
always have unrealistic and optimistic opinion about themselves. When comparing with
others, people tend to believe their ability is above average. Controlling illusion refers to
that people tend to over-estimate their controlling ability over an event. Over optimism
refers to that people tend to be unrealistic and over optimistic about the future. They
tend to over-estimate the occurrence of favorable event and under-estimate the
occurrence of unfavorable event.

In behavioral finance, the over confidence is defined in the following three situations:
(1) the behavior over relied on private information and ignore the public information.
(2) the behavior under-estimate risk. (3) the combination of the above two situations. In
the behavioral financial model, when investors process information, on the one hand
they are over reliant on private information and ignore the public information, on the
other hand, they tend to focus on the information supporting their point of view and
ignore the information contradicting with their view. As over confidence is a kind of
psychological characteristics, it is difficult to measure and in psychology, the deviation of
self evaluated probability and real probability about their self behavior is used to
measure the individuals extent of over confident. The larger the deviation, the more
over confident the individuals will be (Muradoglu & Harvey, 2012).

In behavioral finance, there are also some methods to measure over confidence. For
example, when measuring the extent of over confidence, the investors understanding
about the mean and deviation about risk asset is used. When measuring the over
confident extent of managers, there come the earnings prediction method, multiple
mergers methods and options method. Brav et al. (2006) developed the earnings
prediction method. In his research, the senior manaers are asked to give the confidence
interval of one year and 10 year S&P500 market returns exceeding 80%. The narrower
the confidence interval, the more over confident the senior managers are. Doukas and
Petmezas (2007) had developed the multiple mergers method. He considered that the
senior managers often over evaluate their ability and under-estimate the risk in mergers
and acquisitions. The times of mergers and acquisitions are used to evaluate the extent
of over confident. Malmerdier and Tate (2008) developed the option method
considering that in order to diversify risk, the managers should execute the options as
early as possible or reduce the stock holding. Therefore, whether the managers
postpone the execution of options or increase the stock holdings are used to measure
the over confidence.

However, the above methods are indirect methods and there are no direct and accurate
measurements for over confidence. These methods are usually subjective and their
reliability is doubtful.