Ambiguity and Overconfidence

Abstract

There are two phenomena in behavioral finance and economics which are seemingly unrelated and have been studied separately; overconfidence and ambiguity aversion. In this paper we are trying to link these two phenomena providing a theoretical foundation supported by evidence from an experimental study. We derive a model, based on the max-min ambiguity framework that links overconfidence to ambiguity aversion. In the experimental study we find that overconfidence is decreasing in ambiguity, as predicted by our model.