Information Illusion: Different Amounts of Information and Stock Price Estimates

This study analyzes investors’ perception of different amounts of information and its impact on stock price estimates. We initiate a questionnaire-based stock price forecast competition among 196 undergraduate students in business administration. We show that providing more information increases the perceived amount of relevant information. Individual participants’ characteristics, such as gender, financial knowledge or overconfidence, do not affect these findings. However, the added information does not alter participants’ stock price estimates and their accuracy, but it has an impact on individual expectations about the stock price forecast competition itself. Therefore, the added information acts as placebic information and leads to information illusion. As reaction to the illusion, less overconfident investors decrease their expectations with regard to payoff and chances to win a prize in the competition. More overconfident participants do not show the latter behavior. Our findings provide implications for practitioners and researchers alike. Both regulators and policy makers should consider that placebic information can significantly impact investors’ perception and, therefore, regulation on information that is provided to retail investors should focus on relevant and avoid irrelevant information. Researchers should be aware that placebic information asymmetrically influences expectations of participants in experiments who show different levels of overconfidence.