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.