Illusion of expertise in portfolio decisions: An experimental approach

This paper investigates egocentric biases in financial decisions. Subjects first design a portfolio, whereby each combination of assets yields the same expected return and variance of returns. They are then confronted with two alternative portfolios: the average portfolio and the portfolio of one's selected expert. Illusion of expertise prevails if one nevertheless prefers the own portfolio. Using the random price mechanism reveals that most subjects prefer their own portfolio to the average or the expert's portfolio. Illusion of expertise is shown to be stable individually, over alternatives, and for both elicitation methods: willingness to pay and to accept.