Proceedings of the 6th Economic & Finance Conference, OECD Headquarters, Paris

OVERCONFIDENCE OF STUDENTS AND MANAGERS - COMPARATIVE ANALYSIS

ELŻBIETA WROŃSKA-BUKALSKA

Abstract:

Overconfidence is one of the biases and fallacies that affect cognitive process. But overconfidence is one that is most pervasive. The concept of overconfidence comes from cognitive psychology and is widely applied in behavioral finances. But so far the adoption of overconfidence effect is present when explaining the investors’ decisions. There are still few attempts that aim to explain managers’ behavior with cognitive biases and fallacies. Existing research show that there is relation between manager’s overconfidence and financial decisions. The main problem of all these research is that each one of them applies different overconfidence measures. This paper is to identify the overconfidence phenomena and compare it between the group of managers and the group of managers-to-be (students of finance and accounting). To conduct it, the original tool and measure is proposed and later on verified in order to make it possible for common use of it (not only in psychology or only in finance). The main research hypothesis assumes that the frequency and the level of managers’ overconfidence is the same as frequency and the level of students’ (managers-to-be) overconfidence. The main method applied was to construct the tool to identify and measure the overconfidence. After having identified overconfidence, the U Mann Whitney significance test was applied to compare the overconfidence between the two groups. The result shows that there is statistically significant difference between overconfidence of the managers and students. But the main reason of this difference is the structure of the groups that were the subject of the analysis. Among the students the majority are women, while among the managers the majority are men. This supports the results of previous research showing that the men’s overconfidence is higher than women’s. At the same time it proves that the applied tool and measure of overconfidence is proper and might be used for different groups. After verifying the tool of overconfidence and identifying the overconfidence it might be reasonable to try to find relation between overconfidence and results of human activity (learning results or financial results of running business). Understanding the relation between managers’ overconfidence and financial results allows to apply proper methods of recruitments and supervising. Originality of the paper lies in the applied tool of identifying and measuring overconfidence. The subject and the findings of this paper are important for theory and practice: it helps to shed light on financial management by understanding the managers’ behavior.

Keywords: behavioral finance, overconfidence,

DOI: 10.20472/EFC.2016.006.019

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