Overconfidence and Delegated Portfolio Management

CentER Discussion Paper No. 2003-54

34 Pages Posted: 23 Jun 2004

See all articles by Frédéric Palomino

Frédéric Palomino

EDHEC Business School - Department of Economics & Finance

Abdolkarim Sadrieh

University of Magdeburg

Date Written: 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.

Keywords: Portfolio management, financial markets, financial instutions

Suggested Citation

Palomino, Frédéric and Sadrieh, Abdolkarim, Overconfidence and Delegated Portfolio Management (2003). CentER Discussion Paper No. 2003-54, Available at SSRN: https://ssrn.com/abstract=556067 or http://dx.doi.org/10.2139/ssrn.556067

Frédéric Palomino

EDHEC Business School - Department of Economics & Finance ( email )

France

Abdolkarim Sadrieh (Contact Author)

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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