Overconfidence and Diversification

American Economic Journal: Microeconomics, Forthcoming

20 Pages Posted: 13 Oct 2010 Last revised: 20 Feb 2013

Date Written: February 18, 2013

Abstract

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

Heller, Yuval, Overconfidence and Diversification (February 18, 2013). American Economic Journal: Microeconomics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1691790 or http://dx.doi.org/10.2139/ssrn.1691790

Yuval Heller (Contact Author)

Bar Ilan University ( email )

Dept. of Economics, Building 504
Bar Ilan University
Ramat Gan, 5290002
Israel
+972 5252 82182 (Phone)

HOME PAGE: http://https://sites.google.com/site/yuval26/

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