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The Culture of Overconfidence

V. Bhaskar and Caroline Thomas ()

American Economic Review: Insights, 2019, vol. 1, issue 1, 95-110

Abstract: Perceptions of overconfidence can exacerbate the tendency of reputationally concerned leaders to continue bad projects. Reputation concerns alone induce a bias toward inefficient continuation in a leader receiving information privately. When she is overconfident—or holds a more favorable prior than observers—this tendency is aggravated. This remains true even when she is not really overconfident, but merely perceived to be so. Higher-order beliefs regarding overconfidence induce inefficient equilibrium selection even when there is "almost common knowledge" that the leader is not overconfident. This provides a novel perspective on how culture selects among equilibria: via higher-order beliefs.

JEL-codes: D82 D83 Z13 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/aeri.20180200
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Working Paper: The culture of overconfidence (2018) Downloads
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