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Over-Confidence, Shame and Investments

Roberta Dessi and Xiaojian Zhao ()

No 14-516, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: The available evidence from numerous studies suggests that overconfidence is a more important phenomenon in North America than in Japan. The pattern is reversed for shame, which appears to play a more important role among Japanese than North Americans. We develop a model that endogenizes these differences and examines their economic consequences. In addition, it yields novel implications for differences in overconfidence and behavior within countries. A crucial tradeoff arises in the model between the benefits of encouraging improvement on existing activities and the benefits of promoting initiative and investment in new activities. Overconfidence and high sensitivity to shame emerge as substitute mechanisms to induce efficient investment decisions, generating a "North American" equilibrium with overconfidence and low sensitivity to shame, and a "Japanese" equilibrium with high sensitivity to shame and no overconfidence. The analysis identifies the costs as well as bene fits of reliance on each mechanism, and welfare implications.

Keywords: Overconfidence; shame; investment; cultural differences; cross-sectional differences; memory; cultural transmission (search for similar items in EconPapers)
JEL-codes: D03 D83 Z1 (search for similar items in EconPapers)
Date: 2014-08
New Economics Papers: this item is included in nep-mic
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