Overconfidence, Stability and Investments

Dessí, Roberta and Xiaojian Zhao
Authors registered in the RePEc Author Service: Roberta Dessi

No 8722, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The available evidence from numerous studies suggests that overconfidence varies significantly across countries. We develop a model that endogenizes these differences and examines their economic consequences. A crucial determinant of differences in overconfidence is the degree of expected stability of the environment, with greater changefulness giving rise to more overconfident beliefs. When stability is endogenized, multiple equilibria can emerge, “dynamism†and overconfidence reinforcing each other in one case, stability and realistic self-assessment in another. Evidence from 38 countries is consistent with this relationship. Our model also sheds light on differences in overconfidence across individuals. We conduct a large-scale survey in China and find evidence consistent with the model's cross-sectional implications.

Keywords: Self-confidence; investment (search for similar items in EconPapers)
JEL-codes: D03 D83 Z1 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-evo and nep-neu
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Overconfidence, stability and investments (2018)
Working Paper: Overconfidence, Stability and Investments (2017)
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