Overconfidence and the political and financial behavior of a representative sample

Abstract

We study the relationship between overconfidence and the political and financial behavior of a nationally representative sample. To do so, we introduce a new method of directly eliciting overconfidence of individuals that is simple to understand, quick to implement, and that captures respondents’ excess confidence in their own judgment. Our results show that, in line with theoretical predictions, an excessive degree of confidence in one’s judgment is correlated with lower portfolio diversification, larger stock-price forecasting errors, and more extreme political views. Additionally, we find that overconfidence is correlated with voting absenteeism. These results show that overconfidence is a bias that permeates several aspects of peoples’ lives.