Overconfidence bias

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Overconfidence bias in financial behavior with examples

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Overconfidence bias

  1. 1. Over confidence bias Group Members: Sumaira Gulzar Muhammad Usman Urusa Aziz Raza-Ul-Karim
  2. 2. You are not as smart as you think you are
  3. 3. Overconfidence Bias  Placing too much faith in your knowledge.  Believing that your contribution to a decision is more valuable than it actually is.  overconfidence pertains to how well people understand their own abilities and the limits of their knowledge”. (Hersh Shefrin, 2007)
  4. 4. When People Are Overconfident  Overconfidence can cause a person to experience problems because he may not prepare properly for a situation or may get into a dangerous situation that he is not equipped to handle. Examples of overconfidence include:  A person who thinks his sense of direction is much better than it actually is. The person could show his overconfidence by going on a long trip without a map and refusing to ask for directions if he gets lost along the way.
  5. 5. Effects of overconfidence  Overconfidence effects decision-making, both in the corporate world and individual investments  In a 2000 study, researchers found that entrepreneurs are more likely to display the overconfidence bias than the general population. Some succeed in their ventures, but many do not.
  6. 6. Examples from Stock/Finance Market Example #1…  OGDCL  Before few years IPO (Initial Public Offering) issues shares of OGDCL.  Price of OGDCL shares at that time is Rs. 32.50.  Top 7 executive of OGDCL creates hype between public.  Public started purchasing shares of OGDCL and price tend to Rs. 192.  And after some time clash is happen between executives.  Suddenly OGDCL share price decreased from 192 to 118.
  7. 7. Example # 2…  US Dollar  Continuously increasing in US dollar price  People become overconfident that price of US Dollar will always increase in future  they start buying US Dollar blindly  But suddenly prices are fall in 2014
  8. 8. Example # 3…  Stock Market Crash of 1929  most significant crash in U.S. history  Since 1922, the stock market had gone up, not down -- nearly 20% a year  Over the four days of the stock market crash, the Dow jones losing $30 billion in market value.  when the stock market crashed, brokers called in loans. Many people were wiped out, selling businesses and losing their life savings
  9. 9. Example # 4…  Gold Prices  Continuously increasing in Gold price  People start investing in Gold  But after oct-2012 prices start falling still now
  10. 10. Example # 5…  Motorola (1980)  Mobile Phone coverage was weak  Idea development was technically strong  Technology changed in 1990  Product (Mobile) Launched in 1998  Per Phone Cost 3000$  Moving Cars and inside the building  Bankrupt in 1999  Sell for 25 Million $  Cost 5 Billion $
  11. 11. Thank You…

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