Influence Of Exponential Growth Bias And Overconfidence On Financial Asset Allocation Of Residents

Since 2006 Campell stated the concept of "Household Finance",several financial economists have pay their attention to this field, it has been one of the frontier research field. Many common anomalies in financial market can not be explained in the traditional "rational man" framework, therefore, many financial economists tried their best to explore other theories to explain these facts. Tversky and Kahnemn(1979) proposed "Prospect Theory", first introduced psychology into finance. Since then, many researchers tried to explain the anomalies in financial market from the point of cognitive psychology. Behavioral financial economists put forward a series of theories, including overconfidence and exponential growth bias.Exponential growth bias means person showing continued and substantial underestimate of exponential growth. Exponential growth bias may have two effects on household financial decisions, the bias of payment of interest and the bias of future value. Bias of payment interest means people tend to systematically underestimate loan rate, and bias of future value refers to people lean to underestimate the future value of investment when knowing present value, time and yield rate.People are born to have overconfidence, its main features are as follows:at first, people always tend to overestimate their ability to predict. Secondly, the confidence interval when people estimate figures is always very narrow, which means people tend to overestimate the chance of success. The current research shows that investor overconfidence is a wide phenomenon in capital market, and will bring excessive trading volume and market price fluctuations. But the affirmation of private information and frequent trading doesn’t bring significant excess returns.This thesis uses experimental and quantitative method to study the relationship of overconfidence, exponential growth bias and financial asset allocation of residents. The result of questionnaire shows that testees do have exponential bias and ovrerconfidence, and men showed a stronger tendency of overconfidence. From the experiment, we find that investors who have overconfidence have a higher trading volume, and prefer risk stock. Investor with exponential growth bias also tend to hold more risk asset. But we haven’t found any significant evidence that the two bias have any impact on earnings.This study is the first to introduce exponential growth bias into the study framework of household financial asset allocation, it is a new attempt to study household finance. We also offer some evidence of the relationship of overconfidence and asset allocation in micro-level, by means of questionaire and experiment. Furthermore, we discuss two biases’ effect on asset allocation and earnings, which provides some reference for further study.