Overconfidence and Delegated Portfolio Management

Frederic Palomino and Abdolkarim Sadrieh

No 4231, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Following extensive empirical evidence about ?market anomalies? and overconfidence, the analysis of financial markets with agents overconfident about the precision of their private information has received a lot of attention. All these models consider agents trading for their own account. In this article, we analyse a standard delegated portfolio management problem between a financial institution and a money manager who may be of two types: rational or overconfident. We consider several situations. In each case, we derive the optimal contract and results on the performance of financial institution hiring overconfident managers relative to institutions hiring rational agents, and results on the price impact of overconfidence.

Keywords: Overconfidence; Optimal contract; Risk-taking incentives (search for similar items in EconPapers)
JEL-codes: D82 G11 (search for similar items in EconPapers)
Date: 2004-02
New Economics Papers: this item is included in nep-fin and nep-rmg
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Related works:
Journal Article: Overconfidence and delegated portfolio management (2011)
Working Paper: Overconfidence and Delegated Portfolio Management (2003)
Working Paper: Overconfidence and Delegated Portfolio Management (2003)
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