Heller, Yuval (2010): Overconfidence and risk dispersion.
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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.
Item Type: | MPRA Paper |
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Original Title: | Overconfidence and risk dispersion |
Language: | English |
Keywords: | overconfidence, risk dispersion, 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 |
Item ID: | 25893 |
Depositing User: | Yuval Heller |
Date Deposited: | 18 Oct 2010 15:18 |
Last Modified: | 26 Sep 2019 14:23 |
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URI: | https://mpra.ub.uni-muenchen.de/id/eprint/25893 |
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