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Education and Society/UGC CARE Listed Journal/Year:46/Issue: 3/Vol.: II/April-June 2023/ISSN:2278-6864 1
Education and Society UGC CARE Listed Journal
( ) ISSN 2278-6864
Education and Society
Since 1977
The Quarterly dedicated to Education through Social Development
And Social Development through Education
April-June 2023
Year: 46, Issue-3/ Volume-II
Indian Institute of Education
J. P. Naik Path, Kothrud, Pune- 38
Education and Society/UGC CARE Listed Journal/Year:46/Issue: 3/Vol.: II/April-June 2023/ISSN:2278-6864 2
Indian Institute of Education
Founder of the Institute
Prof. J. P. Naik and Dr. Chitra Naik
Education and Society
Editorial Board:
Prin. (Dr.) Jayasing Kalake, Chief Editor
Dr. Prakash B. Salavi, Executive Editor
Mrs. Shailaja D. Sawant, Secretary
Publisher:
Indian Institute of Education
J. P. Naik Path, Kothrud, Pune- 38
Contact Numbers: 8805159904, 9834109804
Web-site: www.iiepune.org
Email: educationandsociety1977@gmail.com, iiepune1948@gmail.com
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Education and Society, the educational quarterly is owned, printed and
published by the Indian Institute of Education, Pune. It is printed at Pratima
Mudran, 1-B, Devgiri Istate, Survey No. 17/1-B, Plot no. 14, Kothrud Industrial
Area, Kothrud, Pune 38. It is published by the Editor Dr. Jaysing Kalake at Indian
Institute of Education J. P. Naik Path, Kothrud, Pune- 38. Opinions or views or
statements and conclusions expressed in the articles that are published in this issue
are personal of respective authors. The editor, editorial board and the institution
will not be responsible for the same in any way.
Education and Society/UGC CARE Listed Journal/Year:46/Issue: 3/Vol.: II/April-June 2023/ISSN:2278-6864 395
Managing Overconfidence Bias in Decision Making: A
Review of the Literature
Dr. Vijaykumar Dhannur
Assistant Professor,
Shubham Mohan Kusane
Research Scholar
Dept. of Management Studies, Visvesvaraya Technological University, Belagavi
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Abstract:
Overconfidence bias is a well-documented phenomenon in the field of
psychology and behavioral finance. It refers to the tendency of individuals to
overestimate their abilities and the accuracy of their predictions. This bias can have
a significant impact on decision-making, particularly in the context of risk-taking.
The current prevailing research has shown that overconfidence bias can lead
individuals to take on more risk than they should, leading to negative outcomes
such as financial losses or physical harm. Overconfidence can also lead individuals
to ignore or downplay potential risks, leading to poor decision-making. This
behavior can lead to a positive feedback loop, where the overconfident investors'
increased trading activity further reinforces their belief in their abilities, leading to
even more aggressive trading. The literature on overconfidence bias highlights the
importance of recognizing and managing this bias in decision-making, particularly
in contexts where risk-taking is involved. Strategies such as seeking out diverse
opinions and feedback, and taking a more objective approach to decision-making,
can help individuals mitigate the negative impact of overconfidence bias.
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Keywords: Overconfidence bias, Behavioral Finance, Stock Market, Decision
Making and Cognitive Bias
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Introduction:
Investment decisions refer to the choices made by individuals or
organizations regarding the allocation of financial resources into various assets
with the aim of generating a return on investment. These decisions can have a
significant impact on an individual's financial future, as well as the success of a
company. When making investment decisions, it is important to consider several
factors such as the investor's financial goals, risk tolerance, and the current
economic factors. Financial literacy is becoming increasingly important as
governments are prioritizing financial education to enhance the well-being of the
population. It involves a collection of competencies and comprehension required
to make informed financial judgments (Corsini & Giannelli, 2021). Despite that
Education and Society/UGC CARE Listed Journal/Year:46/Issue: 3/Vol.: II/April-June 2023/ISSN:2278-6864 396
there has always been irrationality among the investor courtesy behavioral bias
(Baker et al., 2019), (Paisarn et al., 2021). Of the many biases that researchers
work, one bias that has been very lucrative and spoken about is overconfidence.
Overconfidence bias is a psychological tendency or cognitive bias in which an
individual overestimates their abilities, knowledge, or performance in a particular
area. This bias can have significant consequences in many areas of life, including
decision-making, investment choices, and financial planning (Statman et al.,
2006). In the context of decision-making, overconfidence bias can lead individuals
to overestimate their ability to predict future outcomes or events. For example, an
individual may feel overly confident in their ability to predict the outcome of a
sporting event, political election, or stock market performance. This can lead to
poor decision-making, such as making risky bets or investments based on
incomplete or inaccurate information (Musah et al., 2023). Overconfidence bias
can also impact investment choices and financial planning. Investors who exhibit
overconfidence bias may believe that they have superior knowledge or insight into
a particular company or industry, leading them to make investment decisions
based on incomplete or inaccurate information. This can result in the investor
taking on greater risk or investing in assets that may not align with their overall
financial goals. Additionally, overconfidence bias can lead to the disposition
effect, which is the tendency for investors to hold onto losing investments for too
long and sell winning investments too quickly (Cueva et al., 2019). This can result
in investors missing out on potential gains and experiencing greater losses over
the long term (Tekçe & Yılmaz, 2015).
There are several factors that can contribute to overconfidence bias,
including past successes, social norms, and exposure to media and advertising. For
example, an individual who has experienced past successes may be more likely to
exhibit overconfidence bias, as they may believe that they have a track record of
making successful decisions. Additionally, exposure to media and advertising that
promote the idea of "expert" knowledge or "winning" strategies can reinforce
feelings of overconfidence (Zia et al., 2017). By giving more weight to their
personal signals than the overall market consensus, traders who are overconfident
can cause asset prices to deviate from their true values. This results in excessive
volatility in the market as asset prices become distorted. It is important to note that
such price distortions can lead to the formation of bubbles in asset prices
(Scheinkman & Xiong, 2003). Traces of overconfidence biases have been all the
segment of assets in the capital market like equity (Gupta et al., 2018), commodity
(Yung & Liu, 2009), ETFs (Kunjal and Peerbhai 2021). The bias has its own
influence on the risk preference and tolerance of investors. Overconfidence can
lead individuals to take on risks that are beyond their actual capabilities. For
example, an individual who is overconfident in their ability to invest in the stock
Education and Society/UGC CARE Listed Journal/Year:46/Issue: 3/Vol.: II/April-June 2023/ISSN:2278-6864 397
market may take on more risky investments than they can handle, leading to losses.
Also, overconfidence can lead individuals to ignore or downplay potential risks.
This can lead to poor decision-making, as individuals may not take into account
all the relevant information when assessing the risk of a particular action(Chen et
al., 2017) (Trinugroho & Sembel, 2011). When investors are overconfident, they
tend to link positive market returns with their own skills in selecting profitable
securities. This can result in more aggressive trading behavior during periods of
market gains. Consequently, when overconfidence is prevalent among investors,
past market returns can have a positive impact on current trading activities
(Gervais & Odean, 2001).
In Indian Context the traces of the bias have been studied and found
among the investors in Bombay Stock Exchange (BSE), the analysis of returns
impulse responses to private and public information shocks, it has been observed
that returns tend to overreact to private information and underreact to public
information. This means that the market tends to place more weight on information
that is only available to a select few individuals, while not fully incorporating
information that is publicly available to everyone. As a result, the market may be
slower to adjust to new public information, leading to potential inefficiencies and
market anomalies. This behavior can be attributed to factors such as information
asymmetry and cognitive biases, which can lead to suboptimal decision-making
(Mushinada & Veluri, 2018). The question is what boosts overconfidence among
the investors? The answer to the above question can be simply attributed to two
situations firstly, when investors make accurate forecasts of future returns, they
tend to become overconfident and trade more frequently in the following periods.
This behavior can be attributed to self-attribution bias, where investors attribute
their successful forecast to their own skill or knowledge, leading them to believe
that they can continue to achieve similar results. Conversely, when investors make
incorrect forecasts, their overconfidence may decrease slightly, as they may
recognize that their forecast was flawed. These findings highlight the importance
of understanding the role of cognitive biases in investment decision-making,
particularly in contexts where market gains may influence investor behavior. By
recognizing and managing biases such as self-attribution bias, investors can make
more informed and objective decisions that are not solely driven by
overconfidence or emotions (Chuang & Lee, 2006).
While overconfidence bias can have negative consequences, there are
several strategies that can help individuals mitigate its effects. One such strategy
is to seek out diverse perspectives and opinions when making decisions. Many
Fintech Companies have adopted newer technologies like automation,
gamification etc. that assist investors to make informed decisions. Investors active
participation in gamification can help reduce overconfidence bias and disposition
Education and Society/UGC CARE Listed Journal/Year:46/Issue: 3/Vol.: II/April-June 2023/ISSN:2278-6864 398
effect. This suggests that these biases can be mitigated through increased
engagement with gamified learning experiences (Şenol & Onay, 2023). Another
experiment that was conducted based on the gamification model suggested that by
using the gamified methods of learning, the results can enhance by at least 14.98%
and helps in judgmental forecasting and developing cautions traits among the
individuals (Legaki et al., 2021). The incorporation of gamification elements in
Personal Financial Management (PFM) apps can meet users' desire for
competency and independence, resulting in increased motivation to use them. This
motivation positively influences users' perception of the apps' usefulness and ease
of use, leading to more favorable attitudes towards them. The study further
revealed a positive correlation between users' attitudes towards PFM apps and their
behavioral intention to use them. Overall, these findings suggest that gamification
can enhance the effectiveness of PFM apps and promote user engagement (Bitrián
et al., 2021).
Conclusion:
Overconfidence bias can be both beneficial and dangerous for rational
decision making, depending on the context and situation. On the one hand,
overconfidence bias can lead individuals to take on challenges and pursue
opportunities that they may have otherwise avoided, leading to positive outcomes
and achievements. However, on the other hand, overconfidence bias can lead to
poor decision-making and negative outcomes, particularly in the context of risk-
taking. Overconfident individuals may underestimate the likelihood of negative
outcomes, leading to excessive risk-taking and potential harm. Additionally,
overconfidence bias can lead individuals to ignore or downplay potential risks,
leading to poor decision-making. Furthermore, studies have shown that
overconfidence bias is prevalent among investors, particularly those who are
actively trading in the stock market. Overconfident investors tend to associate
positive market returns with their own security-picking abilities, leading them to
trade more aggressively during periods of market gains. This behavior can lead to
a positive feedback loop, where the overconfident investors' increased trading
activity further reinforces their belief in their abilities, leading to even more
aggressive trading. Understanding the impact of overconfidence bias on decision-
making is crucial for making informed and objective decisions. By recognizing
and managing biases such as overconfidence, individuals can mitigate the negative
impact of these biases and make better decisions that are more aligned with their
goals and objectives.
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