Overconfidence, stability and investments

Roberta Dessi and Xiaojian Zhao

Journal of Economic Behavior & Organization, 2018, vol. 145, issue C, 474-494

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; Cultural differences; Cultural transmission (search for similar items in EconPapers)
JEL-codes: D03 D83 Z1 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (8)

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Working Paper: Overconfidence, Stability and Investments (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:145:y:2018:i:c:p:474-494

DOI: 10.1016/j.jebo.2017.11.030

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