Rationality Under Intrinsic Uncertainty

Both Behavioral Finance and market practitioners view confidence as one of the most important psychological variables influencing investor behavior. In the Behavioral Finance literature, confidence is associated with biased decisions and overreaction: investor confidence leads them to give too much importance to some ideas and to refuse to seriously take new facts into account until the grounds for believing them become overwhelming. Shiller (2000) goes so far as to define confidence as the feeling that nothing can go wrong. In contrast, practitioners consider confidence as a positive characteristic influencing performance, as one of the basic traits of winning traders (Schwager, 1992). This discrepancy reveals the gap that still exists between academic treatments of the psychology of decision-making and the experience of market participants.