Heller, Yuval (2010): Overconfidence and diversification.
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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 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 |
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Original Title: | Overconfidence and diversification |
Language: | English |
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 |
Item ID: | 26161 |
Depositing User: | Yuval Heller |
Date Deposited: | 02 Nov 2010 12:24 |
Last Modified: | 28 Sep 2019 10:23 |
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URI: | https://mpra.ub.uni-muenchen.de/id/eprint/26161 |
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Overconfidence and risk dispersion. (deposited 18 Oct 2010 15:18)
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