Peer Response -The Effect of Over-Confidence in Financial Decision-Making

Peer Response -The Effect of Over-Confidence in Financial Decision-Making

Hello,

Thank you for your post. This is a good perspective on the over-confidence effect. I like how you have utilized evidence from an empirical study focused on the effect of over-confidence in financial decision-making to present your discussion. Based on the evidence presented in the article you have reviewed, it is clear that over-confidence significantly affects how an individual makes their decisions, how they choose the actions they take, and how they proceed with such actions. Over-confidence can potentially corrupt the decision-making processes and lead to negative or unintended outcomes. As you have noted, it has a substantial influence on how people take risks. Arguably, overconfidence is a major factor that influences investment decisions and loss aversion (Armansyah, 2021). This is because most of these investment or financial decisions are based on the mental perception of knowledge of the basics of accounting or the markets, which no empirical evidence may back.

References

Armansyah, R. F. (2021). Overconfidence, Mental Accounting, and Loss Aversion In Investment Decisions. Journal of Auditing, Finance, and Forensic Accounting, 9(1). https://doi.org/10.21107/

ORDER A PLAGIARISM-FREE PAPER HERE

We’ll write everything from scratch

---

Peer 1.) In a study conducted by Moore and Healy (2008), the over-confidence effect was demonstrated through an experiment involving financial decision-making. Participants were asked to predict the outcome of their investments in a stock market simulation. The results showed that participants consistently exhibited over-confidence in their predictions. They believed their forecasts were more accurate than they were, leading them to take higher risks and make more aggressive investment decisions. This experiment exemplifies the over-confidence effect as participants’ confidence in their predictions exceeded the actual accuracy of their forecasts.

In this study, participants over-confidence influenced their decision-making and risk-taking behaviors. This overestimation of their abilities and accuracy led to potentially unfavorable outcomes. The results of this experiment emphasize the importance of recognizing the over-confidence effect in various contexts, including financial decision-making, and highlight the potential impact of over-confidence on individuals’ choices and actions.