Overconfidence by Bayesian-Rational Agents

Eric Van den Steen

Management Science, 2011, vol. 57, issue 5, 884-896

Abstract: This paper derives two mechanisms through which Bayesian-rational individuals with differing priors will tend to be relatively overconfident about their estimates and predictions, in the sense of overestimating the precision of these estimates. The intuition behind one mechanism is slightly ironic: In trying to update optimally, Bayesian agents overweight information of which they overestimate the precision and underweight in the opposite case. This causes overall an overestimation of the precision of the final estimate, which tends to increase as agents get more data. This paper was accepted by Teck Ho, decision analysis.

Keywords: overconfidence; decision analysis; risk; Bayesian updating; differing priors; heterogeneous priors (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (31)

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Related works:
Working Paper: Overconfidence by Bayesian Rational Agents (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:57:y:2011:i:5:p:884-896

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