Overconfidence and diversification Report as inadecuate




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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 -

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 GamesC - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games ; Evolutionary Games ; Repeated Games-





Author: Heller, Yuval

Source: https://mpra.ub.uni-muenchen.de/33816/







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