Cambridge Business Association
Anxiety, Overconfidence, and Excessive Risk Taking
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Anxiety, Overconfidence, and Excessive Risk Taking

Thomas M. Eisenbach and Martin C. Schmalz
Federal Reserve Bank of New York, 2015
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Editorial Rating

7

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  • Innovative

Recommendation

F. Scott Fitzgerald observed that the rich “are different from you and me.” So how are the ultrasuccessful able to make the momentous decisions on which they build their fortunes? The self-confidence of Wall Street bankers and captains of industry is well documented, but how they achieve that assurance is less known. This academic paper offers an interesting hypothesis: It all comes down to forgetting the right information. getAbstract suggests this technical paper to risk specialists who wish to account for the overconfidence of decision makers in economic modeling.

Summary

Psychological research confirms that, in matters of judgment, overconfidence is a prevalent human characteristic. Many market and business-cycle models take overconfidence – a tendency to misjudge one’s abilities or performance by underestimating risks and holding overprecise beliefs – as a given in explaining the actions of traders, investors, entrepreneurs and executives. Overoptimistic people express a level of confidence that the available information fails to support. In contrast, in financial transactions, anxiety manifests as the tendency to take lower risks in immediate...

About the Authors

Thomas M. Eisenbach is an economist at the Federal Reserve Bank of New York. Martin C. Schmalz is an assistant professor of finance at the University of Michigan.

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