Heller, Yuval (2010): Overconfidence and diversification.
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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 principal-agent model in which principal's interest in diversification motivates him to hire overconfident agents. We show that the induced overconfidence satisfies experimental stylized facts. In addition, we show that overconfidence is a unique evolutionarily stable strategy, and that it can Pareto-improve social welfare. Finally, we demonstrate applicability by demonstrating why CEOs hire overconfident intermediate managers, and why investors prefer overconfident entrepreneurs.
|Item Type:||MPRA Paper|
|Original Title:||Overconfidence and diversification|
|Keywords:||overconfidence, diversification, hard-easy effect, evolutionary stability|
|Subjects:||C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games
C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
|Depositing User:||Yuval Heller|
|Date Deposited:||21. Dec 2010 13:18|
|Last Modified:||01. Mar 2013 15:58|
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Overconfidence and risk dispersion. (deposited 18. Oct 2010 15:18)
Overconfidence and diversification. (deposited 02. Nov 2010 12:24)
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- Overconfidence and diversification. (deposited 02. Nov 2010 12:24)