Overconfidence and Delegated Portfolio Management

33 Pages Posted: 23 Jul 2003

See all articles by Frederic Palomino

Frederic Palomino

Centre for Economic Policy Research (CEPR)

Abdolkarim Sadrieh

University of Magdeburg

Multiple version iconThere are 2 versions of this paper

Date Written: May 2003

Abstract

Following extensive empirical evidence about "market anomalies" and overconfidence, the analysis of financial markets with agents overconfident about the precision of their private information has received a lot of attention. However, all these models consider agents trading for their own account. In this article, we analyse a standard delegated portfolio management problem between a financial institution and a money manager who may be of two types: rational or overconfident. We consider several situations. In each case, we derive the optimal contract and results on the performance of financial institution hiring overconfident managers relative to institutions hiring rational agents, and results on the price impact of overconfidence.

Suggested Citation

Palomino, Frederic Albert and Sadrieh, Abdolkarim, Overconfidence and Delegated Portfolio Management (May 2003). Available at SSRN: https://ssrn.com/abstract=423991 or http://dx.doi.org/10.2139/ssrn.423991

Frederic Albert Palomino (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Abdolkarim Sadrieh

University of Magdeburg ( email )

Faculty of Economics and Management
Postbox 4120
39016 Magdeburg
Germany

HOME PAGE: http://www.ww.uni-magdeburg.de

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