Overconfidence and trading volume

Theoretical models predict that overconfident investors will trade more than rational investors. We directly test this hypothesis by correlating individual overconfidence scores with several measures of trading volume of individual investors. Approximately 3,000 online broker investors were asked to answer an internet questionnaire which was designed to measure various facets of overconfidence (miscalibration, volatility estimates, better than average effect). The measures of trading volume were calculated by the trades of 215 individual investors who answered the questionnaire. We find that investors who think that they are above average in terms of investment skills or past performance (but who did not have above average performance in the past) trade more. Measures of miscalibration are, contrary to theory, unrelated to measures of trading volume. This result is striking as theoretical models that incorporate overconfident investors mainly motivate this assumption by the calibration literature and model overconfidence as underestimation of the variance of signals. In connection with other recent findings, we conclude that the usual way of motivating and modeling overconfidence which is mainly based on the calibration literature has to be treated with caution. Moreover, our way of empirically evaluating behavioral finance models—the correlation of economic and psychological variables and the combination of psychometric measures of judgment biases (such as overconfidence scores) and field data—seems to be a promising way to better understand which psychological phenomena actually drive economic behavior.

Engineering and labor specialization during the industrial revolution

This paper explores how technological changes affected labor allocations within the U.S. Navy. During the latter nineteenth century, the officer corps was highly specialized, split between groups of line and staff officers. Developments in general purpose technologies created a dilemma for the organization, as it balanced between the benefits of a specialized workforce implementing increasingly complex technologies with rising communication and coordination costs. We first document the nature and extent of labor specialization in the mid-nineteenth-century Navy—engineers worked more with newer and larger vessels, while line officers worked more with unskilled personnel. The Navy endeavored to destroy this distinction, forcing generalized training and tasks for all officers. We suggest that the Navy’s phased-in approach was an effective strategy, helping the U.S. to become a world-class naval power.     

Using technology to reveal true costs

Healthcare leaders should address three important questions as they prepare to implement new costing systems: Do all providers in their organizations' systems, networks, or partnerships share the same definitions of unit of care and of fixed, variable, incremental, direct, and indirect costs? What are the maintenance processes and protocols for cost center and period matching of revenues and costs? If some providers within a network or partnership are not using costing systems, can an enterprise derive surrogate cost per unit of care?     

Just-in-time delivery comes to knowledge management

Like all primary care physicians, Dr. Bob Goldszer must stay on top of approximately 10,000 different diseases and syndromes, 3,000 medications, 1,100 laboratory tests, and many of the 400,000 articles added each year to the biomedical literature. That's no easy task. And it is, quite literally, a matter of life and death. The Institute of Medicine's 1999 report, To Err Is Human, suggests that more than a million injuries, and 90,000 deaths are attributable to medical errors annually. Something like 5% of hospital patients have adverse reactions to drugs, another study reports, and of those, 43% are serious, life threatening, or fatal. Many knowledge workers have problems similar to Dr. Goldszer's (though they're usually less life threatening). No matter what the field, many people simply can't keep up with all they need to know. In the early years of knowledge management, companies established knowledge networks and communities of practice, built knowledge repositories, and attempted to motivate people to share knowledge. But each of these activities involved a great deal of additional labor for knowledge workers. A better approach, say the authors, is to bake specialized knowledge into the jobs of highly skilled workers. Partners HealthCare has started to embed knowledge into the technology that doctors use in their jobs so that consulting it is no longer a separate activity. Now when Dr. Goldszer orders medicine or a lab test, the order-entry system automatically checks his decision against a massive clinical database as well as the patient's own medical record. Knowledge workers in other fields could likewise benefit from a just-in-time knowledge-management system tailored to deliver the right supporting information for the job at hand.     

Why inexperienced investors do not learn: They do not know their past portfolio performance

Recently, researchers have gone a step further from just documenting biases of individual investors. More and more studies analyze how experience affects decisions and whether biases are eliminated by trading experience and learning. A necessary condition to learn is that investors actually know what happened in the past and that the views of the past are not biased. We contribute to the above mentioned literature by showing why learning and experience go hand in hand. Inexperienced investors are not able to give a reasonable self-assessment of their own past realized stock portfolio performance which impedes investors' learning ability. Based on the answers of 215 online broker investors to an Internet questionnaire, we analyze whether investors are able to correctly estimate their own realized stock portfolio performance. We show that investors are hardly able to give a correct estimate of their own past realized stock portfolio performance and that experienced investors are better able to do so. In general, we can conclude that we find evidence that investor experience lessens the simple mathematical error of estimating portfolio returns, but seems not to influence their “behavioral” mistakes pertaining to how good (in absolute sense or relative to other investors) they are.     

Too far ahead of the IT curve?

Peachtree Healthcare has major IT infrastructure problems, and CEO Max Berndt is struggling to find the right fix. He can go with a single set of systems and applications that will provide consistency across Peachtree's facilities but may not give doctors enough flexibility. Or he can choose service-oriented architecture (SOA), a modular design that will allow Peachtree to standardize incrementally and selectively but poses certain risks as a newer technology. What should he do? Four experts comment on this fictional case study, authored by John P. Glaser, CIO for Partners HealthCare System. George C. Halvorson, the chairman and CEO of Kaiser Permanente, warns against using untested methodologies such as SOA in a health care environment, where lives are at stake. He says Peachtree's management must clarify its overall IT vision before devising a plan to achieve each of its objectives. Monte Ford, the chief information officer at American Airlines, says Peachtree can gradually replace its old systems with SOA. An incremental approach, he points out, would not only minimize risk but also enhance flexibility and control, and would allow IT to shift priorities along the way. Randy Heffner, a vice president at Forrester Research who focuses on technology architectures for computer-based business systems, thinks SOA's modular approach to business design would best meet Peachtree's need for flexibility. He says that Peachtree's CIO sees SOA as a new product category but should instead view it as a methodology. John A. Kastor, a professor at the University of Maryland School of Medicine, questions the goal of standardized care. He argues that it would be difficult to persuade doctors, many of whom are fiercely independent, to follow rigid patterns in their work.