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Overconfidence, Stability and Investments

Roberta Dessi and Xiaojian Zhao ()

No 15-580, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: The available evidence from numerous studies suggests that overconfidence varies significantly across countries. We develop a model that endogenizes these differences and examines their economic consequences. A crucial determinant of difierences in overconfidence is the degree of expected stability of the environment, with greater changefulness giving rise to more overconfident beliefs. When stability is endogenized, multiple equilibria can emerge, \dynamism" and overconfidence reinforcing each other in one case, stability and realistic self-assessment in another. Evidence from 38 countries is consistent with this relationship. Finally, our model also sheds some light on differences in overconfidence within countries, as well as exploring the interaction between overconfidence and sensitivity to shame.

Keywords: Self-confidence; investment; cultural differences; cultural transmission; shame (search for similar items in EconPapers)
JEL-codes: D03 D83 Z1 (search for similar items in EconPapers)
Date: 2015-05, Revised 2017-09
New Economics Papers: this item is included in nep-cbe
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Journal Article: Overconfidence, stability and investments (2018) Downloads
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