Summary of Anxiety, Overconfidence, and Excessive Risk Taking

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Anxiety, Overconfidence, and  Excessive Risk Taking summary
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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.

In this summary, you will learn

  • What constitutes anxiety and overconfidence in business and finance,
  • What role “selective memory” plays in excessive risk taking, and
  • How professionals intentionally forget or disregard warning signals.
 

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.

 

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...

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