Overconfidence and its Influence on Risk


Seminar Paper, 2016

11 Pages, Grade: 1.7


Abstract or Introduction

In a study conducted in 1980 drivers were surveyed about their driving skills in comparison to a group of others. In her experiment, Svenson analyses how people judge their own skill and risk taking engaged in risky activities.
The result of the experiment shows that 88% of US subjects and 77% of Swedish subjects judged their skills above the average skill in their subject group. Preston and Harris (1965) indicate even more bias from subjects. They compared 50 drivers which were involved in accidents, besides being hospitalized, they still showed means stating that they judged themselves more skillful than the average driver.

The central element of the economic paradigm is homo economicus. Homo economicus is described as an individual with rational actions. The homo economicus faces a situation with limited resources to satisfy his needs. Therefore, the homo economicus uses rational decisions to optimize his outcome and gain the highest utility possible. Behavioral economic research on the other hand distinguishes a deviance of human behavior from the rational homo economicus as can be observed in Svenson’s study. The behavior is called overconfidence, which is a widely discussed phenomenon in behavioral economic literature. Psychological studies show that most people are overconfident about their own relative abilities, tend to underestimate their competition and make unreasonably optimistic predictions about their futures. In the following, the characteristics of the behavioral model of overconfidence will be further discussed. Subsequently, the influence of overconfidence on risk taking will be evaluated.

Details

Title
Overconfidence and its Influence on Risk
College
University of Passau
Course
Behavioral Economics and the Seven Sins
Grade
1.7
Author
Year
2016
Pages
11
Catalog Number
V1152399
ISBN (eBook)
9783346541536
Language
English
Keywords
behavioral economics, verhaltensökonomie, verhaltensökonomik, overconfidence, risk taking, risk aversion, the seven sins, experiment, risk behavior, risikoverhalten
Quote paper
Christopher Knoll (Author), 2016, Overconfidence and its Influence on Risk, Munich, GRIN Verlag, https://www.grin.com/document/1152399

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