A Test for Overconfidence with Market Data

Overconfidence refers to the exaggerated beliefs that one might have about his own personal abilities. This phenomenon seems to be pervasive and it could help explaining several economic paradoxes. Still the profession has failed to produce conclusive evidence about overconfident behavior using market data. Most of the evidence that shows that people are overconfident comes from either psychological interviews, surveys or from experiments in economic laboratories. Although these method doubtless have their validity they are not free of criticism, and therefore economists probably do not take overconfidence as seriously as psychologists and behavioral economists suggest they should. I present a working paper version of an empirical test for overconfident behavior using data about individual conduct when searching for a job. Results are consistent with the presence of overconfident behavior. Note that this work constitutes only a first approach to the test. In particular, I will improve methodological aspects of my paper in a future version of my work so that I can get more robust results. A Test for Overconfidence with Market Data