Overconfidence and delegated portfolio management

F.A. Palomino, A. Sadrieh

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We study the impact of overconfidence on investment decisions by financial institutions. These institutions are characterized by the delegation of investment decisions to portfolio managers and the design of contracts that aim at aligning managers’ incentives with those of the institution. We show that when rational and overconfident agents acquire information of the same precision, overconfident agents trade lower quantities than rational agents. However, overconfidence also generates incentives to overinvest in information acquisition. In such cases, overconfident agents trade larger quantities and take more risk than rational agents. The direct consequence of these results is that, as far as delegated portfolio management is concerned, overconfidence generates high trading volumes only through over-acquisition of information. Based on psychological evidence that overconfidence is generated by a self-attribution bias, our results are consistent with recent empirical evidence about mutual fund managers’ portfolio-rebalancing patterns and changes in mutual funds’ advisory contracts.
Original languageEnglish
Pages (from-to)159-177
JournalJournal of Financial Intermediation
Volume20
Issue number2
DOIs
Publication statusPublished - 2011

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Delegated portfolio management
Overconfidence
Investment decision
Managers
Incentives
Mutual funds
Information acquisition
Psychological
Empirical evidence
Delegation
Trading volume
Financial institutions
Attribution
Fund managers
Portfolio rebalancing

Cite this

Palomino, F.A. ; Sadrieh, A. / Overconfidence and delegated portfolio management. In: Journal of Financial Intermediation. 2011 ; Vol. 20, No. 2. pp. 159-177.
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Overconfidence and delegated portfolio management. / Palomino, F.A.; Sadrieh, A.

In: Journal of Financial Intermediation, Vol. 20, No. 2, 2011, p. 159-177.

Research output: Contribution to journalArticleScientificpeer-review

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