Optimism bias, portfolio delegation, and economic welfare

Jian Wang, Xiaoting Wang, Xintian Zhuang and Jun Yang

Economics Letters, 2017, vol. 150, issue C, 111-113

Abstract: This study explores the effects of investor optimism bias in a portfolio delegation framework. We show that the optimistic investor increases his portfolio delegation, while the risk-averse manager reduces investment in the risky asset. The investor suffers welfare loss due to lower expected return, but the manager enjoys increased compensation. The investor’s optimism bias aggravates the moral hazard problem.

Keywords: Optimism bias; Portfolio delegation; Investment strategy; Economic welfare (search for similar items in EconPapers)
JEL-codes: D81 D82 G11 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:150:y:2017:i:c:p:111-113

DOI: 10.1016/j.econlet.2016.11.025

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