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Ambiguity and Overconfidence

Authors: Brenner, Menachem
Izhakian, Yehuda
Sade, Orly
Issue Date: 30-Nov-2011
Series/Report no.: FIN-11-012
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.
Appears in Collections:Finance Working Papers

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