Overconfidence and risk dispersion

Yuval Heller

MPRA Paper from University Library of Munich, Germany

Abstract: Experimental evidence suggests that people tend to be overconfident in the sense that they overestimate the accuracy of their own predictions. In this paper we present a simple principal-agent model in which principal's interest in dispersing risk motivates him to hire overconfident agents. We show that the induced overconfidence satisfies experimental stylized facts (such as, hard-easy effect, false certainty effect and underuse of base rates). In addition, we show that overconfidence is a unique stable evolutionary strategy, and that it can Pareto-improve social welfare. Finally, we demonstrate applicability by: 1) demonstrating why CEOs hire overconfident intermediate managers, and 2) explaining why investors prefer overconfident entrepreneurs.

Keywords: overconfidence; risk dispersion; hard-easy effect; evolutionary stability (search for similar items in EconPapers)
JEL-codes: C72 C73 (search for similar items in EconPapers)
Date: 2010-09-26
New Economics Papers: this item is included in nep-ent, nep-evo, nep-exp and nep-neu
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/25893/1/MPRA_paper_25893.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/26161/1/MPRA_paper_26161.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/27554/1/MPRA_paper_27554.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/33816/1/MPRA_paper_33816.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/44469/1/MPRA_paper_44469.pdf revised version (application/pdf)

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:pra:mprapa:25893

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().