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The culture of overconfidence

V Bhaskar and Caroline Thomas ()

No 12740, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Why do political leaders or managers persist with their pet projects and policies despite bad news? When project continuation is a more informative experiment than project termination, a reputationally concerned leader is biased towards continuation, as it enables her to disclose her private information. Perceived overconfidence on the part of the leader aggravates this tendency, even when the leader is not, in fact, overconfident. Higher-order beliefs regarding overconfidence can induce inefficient equilibrium selection even when it is ``almost common knowledge" that the leader is not overconfident. Thus, a culture where leaders are expected to be overconfident can have undesirable effects even upon leaders who have correct beliefs.

Keywords: Higher-order beliefs; Mis-specified models; Non-common priors; overconfidence; Policy persistence (search for similar items in EconPapers)
JEL-codes: C73 D72 D82 (search for similar items in EconPapers)
Date: 2018-02
New Economics Papers: this item is included in nep-pol and nep-ppm
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Journal Article: The Culture of Overconfidence (2019) Downloads
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