Illusion of Expertise in Portfolio Decisions:An Experimental Approach

This paper focuses on egocentric biases in financial decisions. Subjects first designa portfolio, whereby each combination of assets yields the same expected returnand variance of returns. They are then confronted with two alternative portfolios;the average portfolio and the portfolio of one’s selected expert. Illusion of expertiseprevails if one prefers nevertheless the own portfolio. Using the random pricemechanism reveals that most subjects prefer their own portfolio to the average orthe expert’s portfolio. Illusion of expertise is shown to be stable individually, overalternatives, and for both elicitation methods, willingness to pay and to accept.