A new study shows 'overconfident' investor are more likely to make risky investments in hybrid securities. File Photo by John Angelillo/UPI |
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BRISBANE, Australia, March 20 (UPI) -- If someone believes they're in control of something uncontrollable, it's logical to think they would be prone to risk taking. But science demands data -- repeatable evidence.
Researchers at Queensland University of Technology provided evidence with an investment game. But before having participants spread a hypothetical portfolio across a mix of bonds, hybrid securities and stock shares, researchers gave players a series of personality and behavioral tests.
The results of tests and game showed that investors with 'illusion of control' and 'overconfidence' biases were more likely to make risky investments and allocate a greater portion of the portfolio to complex hybrid securities.
Hybrid securities combine elements of securities, debt and equity. They allow issuers (banks or companies) to borrow money from investors in exchange for a guaranteed cash flow of interest payments.
Players with an established illusion of control bias were more likely to ignore online messages warning about the risks involved in trading the "complex products."
"Illusion of control bias describes the tendency of individuals to believe that they can control or at least influence the outcome of an uncertain event, when they actually cannot," lead researcher Anup Basu, an economist at QUT, explained in a press release.
"For example when buying Lotto tickets, some individuals believe choosing their own numbers, as opposed to being assigned random numbers, increases their odds of winning," Basu added. "This is one of many examples of 'illusion of control' bias where people incorrectly believe they can influence the outcome of an uncertain event."
In pregame tests, participants even acknowledged a limited understanding of hybrid securities. But overconfident investors were still 14 percent more likely to invest in them.
"Overconfidence may lead to portfolio under-diversification, e.g. holding concentrated positions in a few hybrid securities, and can make investors underestimate downside risk and perceive hybrids to be safer investments than they are," Basu said.
The new study was published by the Australian Securities and Investments Commission.
