Overconfidence, Effort, and Investment

Abstract

A positive relation between confidence and effort/investment provision has been theoretically justified and practically assumed in the literature, but has not been thoroughly investigated. We test and confirm this positive relation between direct measures of confidence and choice of effort or investment. More precisely, strong overconfidence results in excess investment of effort and money, underconfidence induces insufficient effort provision and underinvestment, and moderate overconfidence leads to accurate decisions. Our experimental results can be generalized as they are based on different subject pools (financial professionals and students), media (computer-, paper-, and web-based), and types of effort (real mental effort and monetary effort, i.e. investment).

Keywords: Self-confidence, Overconfidence, Judgmental Bias, Overinvestment,

JEL Classification: G11, J22