Overconfidence and Diversification
American Economic Journal: Microeconomics, Forthcoming
20 Pages Posted: 13 Oct 2010 Last revised: 20 Feb 2013
Date Written: February 18, 2013
Experimental evidence suggests that people tend to be overconfident in the sense that they overestimate the accuracy of their private information, judgment and intuition. In this paper we present a novel evolutionary foundation for overconfidence: diversification of risk. In addition, the model explains various stylized facts that characterize overconfidence. Finally, an equivalent formulation of the model illustrates why principals may prefer overconfident agents in various strategic (non-evolutionary) interactions.
Suggested Citation: Suggested Citation