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• Session 3: Bright Sides and Dark Sides of Overconfidence

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• what are Two manifestations of overconfidence:

  1 Miscalibration (overprecision).
  2 Better than the average effect.

• What is miscalibration and what are two reasons  for miscalibration

  Overconfidence - miscalibration Miscalibration is the systematic underestimation of the range of potential outcomes, i.e. excessive confidence about having accurate information.
  
  Reasons for miscalibration:
  
  Agents overestimate their ability to predict the future.
  
  Agents underestimate the volatility of random effects.

• Miscalibration vs. Optimism what is the difference in this financial context

  Optimistic investors overestimate the mean of their firm cash flows.
  
  
  Miscalibrated investors underestimate the volatility of their firm future cash flows.

• What are two ways to finance a corporate investment.name 2 Corporate investment distortions:

  Financing corporate investments:
  1 Internal financing (cash flow).
  2 External financing sources: - Borrow debt (bank or bonds). - Issue equity  
  
  
  1 Underinvestment - good projects can be rejected.
  
  2 Overinvestment - bad projects can be accepted.

• Ben-David, Graham and Harvey (2013). What are the three research questions?

  1 Are CFOs miscalibrated? Measure the narrowness of their distribution of predicted future returns.
  
  2 Does overprecision spread to corporate planning and forecasting?
  
  3 What is the effect of miscalibration on corporate investments and leverage?

• Ben-David Graham and Harvey (2013)What is the distribution of imputed volatilities  , filled in by CFO as forecasts

  The imputed individual volatilities of CFO forecasts are centered at 4%, and most of the distribution lies between 1% and 15%.

• Ben-David Graham and Harvey (2013)Are CFOs more miscalibrated in volatile periods?

  In quarters with an above-median VIX, only 23.0% of the time do one-year-ahead S&P 500 realizations fall within the 80% confidence interval that CFOs provide

• Understanding CFO forecasts and miscalibration. -is there a relation between s&p500 returns and other relevant items?

  CFOs cannot predict future returns: no relation between S&P 500 future one-year realized returns and CFO forecasts.

• - what can we say about miscalibration and variation over time?

  
  
  Miscalibration varies over time: the confidence bounds of CFO forecasts are wider in periods of increased volatility, but the calibration does not improve. 

• - what can we say about education and age on short and long term miscalibration

  
  Education and age have a positive effect on long term miscalibration, but no relation with short term miscalibration.