Investment strategy and selection bias: An equilibrium perspective on overconfidence

Philippe Jehiel ()

No 10868, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Prospective investors of new projects consider the returns of implemented projects with similar (observed) attributes and invest if the empirical mean return exceeds the cost. The steady states of such economies result in suboptimal investment decisions due to the selection bias in the sampling procedure. Assuming higher attributes are associated with higher returns, there is systematic overinvestment as compared with the Bayesian benchmark, thereby illustrating that selection bias may explain entrepreneurial overconfidence. Various extensions are considered to illustrate the negative externality that rational investors exert on other investors, the effect of correlation between the attributes considered by various investors, and how trading may be affected by the sampling procedure.

Keywords: Investment strategy; Overconfidence; Selection bias (search for similar items in EconPapers)
JEL-codes: C70 D82 D83 D84 (search for similar items in EconPapers)
Date: 2015-10
New Economics Papers: this item is included in nep-cbe, nep-cse, nep-ent, nep-gth and nep-ino
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://cepr.org/publications/DP10868 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:10868

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP10868

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().