XXVI Edition

14-15-16 December 2017"

Confidence, Overconfidence and Banking Behavior

Silipo Damiano, Università degli studi della Calabria
Verga Giovanni, university of Parma
Hlebik Sviatlana, Crédit Agricole Cariparma (Italy)

The paper investigates the causes of confidence and overconfidence and their effects on banking behavior and performance for a large sample of American banks in the period 2000-2013. We construct a new indicator of confidence based on banks’ loss provisions that is able to measure behavioral bias as well as changes in confidence through time. We show that the increase in risk that led up to the 2007-2008 financial crisis was generated mainly at banks with an intermediate degree of managerial confidence (mid-confidents). Hence, unlike the previous literature on overconfidence, we find that the spread of confidence is more important than behavioral bias at a relatively small group of banks. This is due to the fact that despite the greater risk of the overconfident banks, what actually drives the results is the greater weight of the mid-confident institutions. However, more risk-taking is not always rewarded by higher profitability. That is, our findings suggest that if the aim is to prevent financial crises, it is more important to restrain excessive risk-taking by the bulk of bank managers than to curb overconfidence among a relative few.

Area: Banking

Keywords: Confidence Index, Overconfidence Index, Banking behavior, 2007-2008 financial crisis/crash

Paper file

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