Impact of managerial overconfidence on abnormal audit fee: From the perspective of balance mechanism of shareholders.
ABSTRACT: Overconfidence, as a psychological feature that is difficult to measure, means that managers are overconfident in their management ability, investment judgment ability and knowledge richness, thus overestimating their ability and making irrational behavior. Based on the sample of Chinese listed firms from 2014 to 2018, we measure managerial overconfidence in terms of age, gender, education, position and salary, and analyzed the relationship between overconfidence, abnormal audit fees, and the balance mechanism of shareholders. The research results show that there is a significant positive correlation between managerial overconfidence and abnormal audit fees, and the balance mechanism of shareholders can significantly inhibit the positive correlation between managerial overconfidence and abnormal audit fees. The research results of this paper are conducive to the supervision department to further improve the relevant supervision measures, improve the audit quality, and provide theoretical support for the more specific requirements of audit fee information disclosure.
Project description:<h4>Objective</h4>This study aims to connect two strands of the psychology and economics literature, i.e., behavioural finance and agent-based macroeconomics, to assess the impact of managerial overconfidence at the micro and macro levels of the economy as a whole.<h4>Method</h4>We build a macroeconomic stock-flow consistent agent-based model that is calibrated for the specific case of Poland to explore whether the overconfidence of top corporate managers in the context of their initial capital structure decisions is detrimental for the firms being managed in this way, the financial market dynamics, and the selected macroeconomic indicators. We model heterogeneous firms with different capital structure decision criteria depending on their degree of managerial overconfidence. Our model also includes a complete macroeconomic closure with aggregated households, capital producers, banking, and a public sector.<h4>Results</h4>We find that firms with overconfident managers outperform in terms of investment and size but are also more fragile, thereby making them more likely to default. Finally, we run policy shocks and show that while investors' flight to liquidity creates financial turmoil and increases the probability of default.<h4>Conclusions</h4>This paper contributes to the knowledge base by linking behavioural corporate finance and agent-based macroeconomics. In general, the excess overconfidence on the micro level, either an increase in the proportion of overconfident firms or a higher degree of overconfidence among managers, has a strong destabilizing impact on the economy as a whole on the macro level.
Project description:Confidence and overconfidence are essential aspects of human nature, but measuring (over)confidence is not easy. Our approach is to consider students' forecasts of their exam grades. Part of a student's grade expectation is based on the student's previous academic achievements; what remains can be interpreted as (over)confidence. Our results are based on a sample of about 500 second-year undergraduate students enrolled in a statistics course in Moscow. The course contains three exams and each student produces a forecast for each of the three exams. Our models allow us to estimate overconfidence quantitatively. Using these models we find that students' expectations are not rational and that most students are overconfident, in agreement with the general literature. Less obvious is that overconfidence helps: given the same academic achievement students with larger confidence obtain higher exam grades. Female students are less overconfident than male students, their forecasts are more rational, and they are also faster learners in the sense that they adjust their expectations more rapidly.
Project description:Overconfidence has long been considered a cause of war. Like other decision-making biases, overconfidence seems detrimental because it increases the frequency and costs of fighting. However, evolutionary biologists have proposed that overconfidence may also confer adaptive advantages: increasing ambition, resolve, persistence, bluffing opponents, and winning net payoffs from risky opportunities despite occasional failures. We report the results of an agent-based model of inter-state conflict, which allows us to evaluate the performance of different strategies in competition with each other. Counter-intuitively, we find that overconfident states predominate in the population at the expense of unbiased or underconfident states. Overconfident states win because: (1) they are more likely to accumulate resources from frequent attempts at conquest; (2) they are more likely to gang up on weak states, forcing victims to split their defences; and (3) when the decision threshold for attacking requires an overwhelming asymmetry of power, unbiased and underconfident states shirk many conflicts they are actually likely to win. These "adaptive advantages" of overconfidence may, via selection effects, learning, or evolved psychology, have spread and become entrenched among modern states, organizations and decision-makers. This would help to explain the frequent association of overconfidence and war, even if it no longer brings benefits today.
Project description:Resources are often limited, therefore it is essential how convincingly competitors present their claims for them. Beside a player's natural capacity, here overconfidence and bluffing may also play a decisive role and influence how to share a restricted reward. While bluff provides clear, but risky advantage, overconfidence, as a form of self-deception, could be harmful to its user. Still, it is a long-standing puzzle why these potentially damaging biases are maintained and evolving to a high level in the human society. Within the framework of evolutionary game theory, we present a simple version of resource competition game in which the coevolution of overconfidence and bluffing is fundamental, which is capable to explain their prevalence in structured populations. Interestingly, bluffing seems apt to evolve to higher level than corresponding overconfidence and in general the former is less resistant to punishment than the latter. Moreover, topological feature of the social network plays an intricate role in the spreading of overconfidence and bluffing. While the heterogeneity of interactions facilitates bluffing, it also increases efficiency of adequate punishment against overconfident behavior. Furthermore, increasing the degree of homogeneous networks can trigger similar effect. We also observed that having high real capability may accommodate both bluffing ability and overconfidence simultaneously.
Project description:This paper contributes to a better understanding of the biological underpinnings of overconfidence by analyzing performance predictions in the Cognitive Reflection Test with and without monetary incentives. In line with the existing literature we find that the participants are too optimistic about their performance on average; incentives lead to higher performance; and males score higher than females on this particular task. The novelty of this paper is an analysis of the relation between participants' performance prediction accuracy and their second to fourth digit ratio. It has been reported that the digit ratio is a negatively correlated bio-marker of prenatal testosterone exposure. In the un-incentivized treatment, we find that males with low digit ratios, on average, are significantly more overconfident about their performance. In the incentivized treatment, however, we observe that males with low digit ratios, on average, are less overconfident about their performance. These effects are not observed in females. We discuss how these findings fit into the literature on testosterone and decision making and how they might help to explain seemingly opposing evidence.
Project description:We examine the role of overconfidence in news judgment using two large nationally representative survey samples. First, we show that three in four Americans overestimate their relative ability to distinguish between legitimate and false news headlines; respondents place themselves 22 percentiles higher than warranted on average. This overconfidence is, in turn, correlated with consequential differences in real-world beliefs and behavior. We show that overconfident individuals are more likely to visit untrustworthy websites in behavioral data; to fail to successfully distinguish between true and false claims about current events in survey questions; and to report greater willingness to like or share false content on social media, especially when it is politically congenial. In all, these results paint a worrying picture: The individuals who are least equipped to identify false news content are also the least aware of their own limitations and, therefore, more susceptible to believing it and spreading it further.
Project description:Child development research on overconfidence suggests that the bias is present and persistent in preschoolers and kindergartners. However, little is known about what drives overconfidence among young decision-makers, how it changes over a large number of repetitions, and whether such changes differ by gender or age. The current experimental study analyzes data from 60 children, aged 4 years 0 months to 6 years 10 months, who played 60 turns of the Children's Gambling Task and provided regular estimates on their performance. A video intervention, designed to demonstrate the consequences of disadvantageous choices, was tested in a double-blind randomized controlled trial to assess its impact on overconfidence. The results show that every third participant remained overconfident even after 60 trials and constant feedback. Unlike previously reported, gender seems to be a determining factor in this process. Lastly, providing additional information through a video intervention appears to have no impact on participants' overconfidence levels.
Project description:Overconfidence is sometimes assumed to be a human universal, but there remains a dearth of data systematically measuring overconfidence across populations and contexts. Moreover, cross-cultural experiments often fail to distinguish between placement and precision and worse still, often compare population-mean placement estimates rather than individual performance subtracted from placement. Here we introduce a procedure for concurrently capturing both placement and precision at an individual level based on individual performance: The Elicitation of Genuine Overconfidence (EGO) procedure. We conducted experiments using the EGO procedure, manipulating domain, task knowledge, and incentives across four populations-Japanese, Hong Kong Chinese, Euro Canadians, and East Asian Canadians. We find that previous measures of population-level overconfidence may have been misleading; rather than universal, overconfidence is highly context dependent. Our results reveal cross-cultural differences in sensitivity to incentives and differences in overconfidence strategies, with underconfidence, accuracy, and overconfidence. Comparing sexes, we find inconsistent results for overplacement, but that males are consistently more confident in their placement. These findings have implications for our understanding of the adaptive value of overconfidence and its role in explaining population-level and individual-level differences in economic and psychological behavior.
Project description:The overconfidence, a well-established bias, in fact leads to unrealistic expectations or faulty assessment. So it remains puzzling why such psychology of self-deception is stabilized in human society. To investigate this problem, we draw lessons from evolutionary game theory which provides a theoretical framework to address the subtleties of cooperation among selfish individuals. Here we propose a spatial resource competition model showing that, counter-intuitively, moderate values rather than large values of resource-to-cost ratio boost overconfidence level most effectively. In contrast to theoretical results in infinite well-mixed populations, network plays a role both as a "catalyst" and a "depressant" in the spreading of overconfidence, especially when resource-to-cost ratio is in a certain range. Moreover, when bluffing is taken into consideration, overconfidence evolves to a higher level to counteract its detrimental effect, which may well explain the prosperity of this "erroneous" psychology.
Project description:Overconfidence has been identified as a source of suboptimal decision making in many real-life domains, with often far-reaching consequences. This study identifies a mechanism that can cause overconfidence and demonstrates a simple, effective countermeasure in an incentive-compatible experimental study. We observed that joy induced overconfidence if the reason for joy (an unexpected gift) was unrelated to the judgment task and if participants were not made specifically aware of this mood manipulation. In contrast, we observed well-calibrated judgments among participants in a control group who were in their resting mood. Furthermore, we found well-calibrated judgments among participants who received the joyful mood induction together with questions that forced them to reflect on their current mood and the (ir)relevance of its cause to our judgment tasks. Our findings suggest that being aware of one's positive mood and the reason for that mood may effectively reduce overconfidence for a short period.