Are Swiss Pension Fund Managers overconfident?

Christoph Gort, Mei Wang, Michael Siegrist

Target Journal:Journal of Behavioral Finance

March 26, 2007

University of Zurich, March 26, 2007 2

AgendaIntroduction

Hypotheses

Sample and questionnaire

Are Swiss pension fund managers miscalibrated?

Individual characteristics and miscalibration

Conclusions

Facts about pension plan investments

Policy Implications

University of Zurich, March 26, 2007 3

Introduction 1-2

Students and private investors are overconfident (Odean (1998)) but what about managers of Swiss pension plans?

Overconfidence in the domain of financial markets

Facets of overconfidence (see Glaser and Weber (2003))Miscalibration

Better-than-average-effect

Illusion of Control

Overoptimism

Focus on differences across individuals. Evidence on miscalibration on average provides not enough information

University of Zurich, March 26, 2007 4

Introduction 2-2

Impacts of overconfidenceUnderestimation of risk (De Long et al (1991))

Increased risk taking after success (Gervais and Odean (2001))

Lower expected utility but higher risks in theoretical models (De Long et al (1991))

Lower performance on financial markets (Odean (1999))

Lower performance on experimental markets (Biais et al (2002))

Over- and underreaction to news in the market (Daniel et al (1998))

Higher trading volumes (Barber and Odean (2001))

More active management despite unsuccessful track record (Lakonishok et al (1992))

University of Zurich, March 26, 2007 5

Hypotheses

Practitioners of Swiss pension funds are miscalibrated...

They provide too narrow confidence intervals for estimates of

historical returns

as well as for return forecasts on financial markets

...more overconfident than a convenience sample

Individual characteristics determine overconfidenceEducation (4 categories)

Experience (3 categories)

Age

…

University of Zurich, March 26, 2007 6

SampleProfessional sample with practitioners in Swiss pension funds

108 professionals

Response rate of 22.6%

Managers and investment committee members

Large differences across educations, experiences and ages

Not enough data to study gender differences

Laymen sample with employees from the City of Zurich104 participants

Response rate not available

Pretty heterogenous sample

University of Zurich, March 26, 2007 7

QuestionnaireTasks in questionnaire

Individual characteristics

90% confidence intervals for return forecasts in different asset classes. Upper and lower boundaries

90% confidence intervals for historical annual returns in different asset classes. Upper and lower boundaries

Roughly 20 minutes to complete (too long)

Surveymonkey and hardcopies to distribute questionnaire

Roughly 3 months of data collection

SPSS 13 for data analysis

University of Zurich, March 26, 2007 8

Evidence for historical return confidence intervals

University of Zurich, March 26, 2007 9

Evidence for future return confidence intervals

University of Zurich, March 26, 2007 10

Key findings from 90% confidence intervals

Intervals for historical returns are too narrow

Not 90% but only about 70% are included

Underestimation of upside as well as downside

Intervals for future returns are even narrower

Very low implied volatility

Well informed about relative risks of asset classes

Laymen are more miscalibrated than Swiss pension plan managers

University of Zurich, March 26, 2007 11

Individual characteristics and miscalibration 1-3

University of Zurich, March 26, 2007 12

Individual characteristics and miscalibration 2-3

University of Zurich, March 26, 2007 13

Individual characteristics and miscalibration 3-3

Key findingsEducation from university (especially general) reduces miscalibration

More experience reduces miscalibration

Age increases miscalibration

Financial education from university is related to more accurate confidence intervals

Level of significance varies across the different asset classes and across the professional and the laymen samples but the effects are all in line with each other

University of Zurich, March 26, 2007 14

Conclusions

The practitioners of Swiss pension funds are miscalibrated

Laymen are more miscalibrated than professionals of Swiss pension plans

Miscalibration is pretty stable across individuals in different estimation and forecasting tasks

Miscalibration is (partly) determined by individual characteristics like education, experience and age

Younger people with an education from university and also some experience finance are the least miscalibrated