Risk, Overconfidence and Production in a Competitive Equilibrium

David R. Just, Ying Cao and David Zilberman ()

No 49161, 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin from Agricultural and Applied Economics Association

Abstract: Previous studies have found underestimation of risk, or overconfidence, to be pervasive. In this paper, we model overconfidence as a reduction in perceived variance. We generalize the analysis of Sandmo and examine the effects of competition on firms displaying overconfidence. Cases for both competitive equilibrium and imperfect competition are investigated. We show that overconfidence may strictly dominate rationality in a competitive market by leading risk averse producers to invest greater amounts and produce more. This leads to a higher average profit, and greater variance of profits, leaving the producer a greater probability of surviving competitive pressures. Despite the greater variance of profits, if enough producers underestimate their risk, they should collectively drive more rational decision makers from the market. Our results suggest that overconfidence may be as important a determinant of market behavior as diminishing marginal utility of wealth.

Keywords: Overconfidence; Misperception; Production; Competition; Production Economics; Risk and Uncertainty (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-mic
Date: 2009
View list of references

Downloads: (external link)
http://purl.umn.edu/49161 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:ags:aaea09:49161

Access Statistics for this paper

More papers in 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin from Agricultural and Applied Economics Association
Contact information at EDIRC.
Series data maintained by AgEcon Search ().