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GUEST COMMENT: A very small minority of financial services professionals have a realistic view of their ability

Our research suggests that most financial services professionals either overestimate or underestimate their abilities.

Working with a sample of 105 experienced, educated financial services professionals, most of whom held senior positions in banking, we looked at the difference between how these individuals rated their ability to forecast the US-Dollar-Euro-exchange rate, and their actual forecasting success.

The results were illuminating. They revealed that 51% of our target group were overconfident of their abilities, 36% were under-confident, and just 12% were ‘balanced’ according to our measure.

To a degree, this makes sense. It is difficult to systematically outperform the market, making it equally difficult to assess the systematic component in one’s own forecasting performance. Therefore, self-ratings will necessarily be biased and largely accidental.

Equally, however, our results suggested that overconfidence was more prevalent amongst the inexperienced financial services professionals in our sample, and that experienced financial services professionals tended towards under-confidence.

In our reference situation of an average forecaster, eight more years of experience led to a 12% lower probability if overconfidence, and a 10% higher probability of under-confidence.

We also found evidence that fund managers were less overconfident than researchers, a phenomenon we explained by the fact that fund managers appear to receive more direct feedback regarding their performance.

In conclusion, it seems that few financial services professionals have a balanced view of their abilities. On average, bad forecasters think they’re better than they are, and good forecasters think they’re worse. If you want to reduce overconfidence the implications are twofold: employ experienced professionals, and give them continuous feedback.

To view the full research paper, click here.

Comments (15)

Comments
  1. Oliver and Lukas, get a proper job before you comment on other individuals…..

    Academicsaregeeks Reply
     
  2. Of yourse, you could also fire the inexperienced without giving them feedback.

  3. what . a . joke .

    the hypothesis, the sample selection..mein gott! furchbar

  4. Highly inaccurate, judgmental in nature and uses “reversed scientific method” approach – have a predefined conclusion, run the experiment, then discard all unfit results.

    Clearly the two “researchers” have no understanding about how prediction and industry consensus work. Even the most highly regarded equity / market research analysts could be wrong. Running a “simulation” on one occasion where the market is in instability then commenting (and judging) the result won’t mean squat. They even tried to make this fancy by plotting random graphs and put random tables in the paper…pathetic.

    I suggest you run the simulation for 5 years, in 3-month intervals, then I’m sure you’ll get a totally different picture.

    Yet another example of those who can’t get their feet into financial services and moaning about it.

  5. markets are efficient, trying to make forecasts is a mugs game.

  6. @jwkt05 … you say “run the simulation for 5 years, in 3-month intervals, then I’m sure you’ll get a totally different picture”
    It says in the opening statement the data set covers several years, the ZEW data set is over 17 years on a monthly basis!!
    As to yr opinion of “reversed scientific method” et al, the less said the better. Their conclusions that the more experienced a person is & the better feedback they can get on their performance, means that a person has a better grip of the accuracy of their predictions; also the older & the more experienced a person is, the less likely they are to have an inflated sense of their own abilities makes alot of sense, not because the young guys are dumb, but because the older guys have experience and experience teaches you caution, both of these conclusions make alot of sense.
    Finally, these guys work in the Dept of Economics at a respected university, if they wanted to work in fin srvcs I am sure they cld find a job, what are your qualifications? Are you upset because you have been in the business less than 3 yrs so you feel they are talking about you? Show some respect sonny, & wind in yr hubris, children shld be seen and not heard.

  7. @~jwkt continued….kevinmchugh7 disagrees with the researchers but doesnt stoop to childish slagging off, amazing the difference a few more years under your belt makes to maturity. Lets hope you make it out of your probationary period and grow up to be a bit more like him. As for “Academicaregeek” ‘s opinion, it depends on what your definition of a “proper job” is. I have been in trading/investment management for over 20 years and lets be honest, working as a researcher at a university is a far more valuable job to society and mankind than what we do. The money is great, lets enjoy that fact and let that be enough, but lets not pretend we are doing a proper job or indeed a valuable job for society on a wider level

  8. Nothing new here to be honest and this is pretty much standard human behaviour so not really isolated to people working within financial services — Behavioural Investing by Moniter highlights a number of research papers on this specific issue and other biases that exist. Also, one would hope a seasoned professional has a well calibrated brain in terms of assigning confidence intervals to their predictions. However, as we all know from recent events, that is also not necessarily the case.

  9. jwkt reminds me of the Oscar Wilde quote:

    I am not young enough to know everything.

  10. “academicsaregeeks” + “Me 20” + “kevinmchugh” + “jwkt05”:

    Are you chaps for real? If your so confident, why don’t you place a few trades on the market and turn 1,000 into 1,000,000? mmm … I know why – you haven’t made a profitable trade recently, and probably loose money 6 times out of 10. Or is 1,000 your annual salary?

    Gee, if your ‘5yr simulation, in 3 month intervals’ is so great, what are you doing reading this forum? Why aren’t you relaxing on your private yacht, drinking mohitos, and getting a shoulder rub by a 22 year old swedish girl?

    You chaps are a prime example of “informed ingnorance” – when you only have half the facts, you think you know everything.

  11. @Alidesai – looks like you missed out the ‘if’ at the beginning of your comment.

  12. @egghead – no I haven’t.

  13. @mwells. I agree with you. Not particularly familiar with the subject but, from my personal experience, these conclusions tend to make sense.

    @Alidesai. Dude, what are you talking about?!

    NY Knickerbocker Reply
     
  14. @NY Knickerbocker

    Please follow the thread – if its too complicated for you perhaps you should try a less onerous subject ? like football or baseball …

  15. @Alidesai…….The Efficient Market Hypothesis is a theory dear boy, not a fact. Therefore egghead is right, you have missed out the “if”

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