Ambiguity and Gender Differences in Financial Decision Making: An Experimental Examination of Competence and Confidence Effects

This paper reports the results of an experiment that brings together psychological measures of
competence and overconfidence with laboratory economic measures of individual valuations
of uncertainty. We examine the valuations of risky and ambiguous lotteries in a financial
decision context. The experiment can be viewed in two parts. The first part replicates an
experimental design reported by Heath and Tversky (1991) but within a financial market
context. This part produces two measures: 1) competence, the perception of feeling
knowledgeable or competent in an area and 2) overconfidence, the well documented result
that many individuals overestimate their ability. These measures, together with an indicator of
objective knowledge, were used to explain elicited certainty equivalents in the second part of
the experiment. Certainty equivalents were elicited for lotteries that were contingent on the
price movements of real stock and bond funds, the price changes of simulated virtual funds,
and pure risk lotteries. These represent three different levels of uncertainty: two-sided
ambiguity, one-sided ambiguity and pure risk. Our results show a significant relationship
between individual overconfidence and competence measures and elicited values of lotteries
in a financial decision context. Further, the interaction of overconfidence, competence and
knowledge measures with gender produce nearly opposite effects.