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Persistent Overconfidence and Biased Memory: Evidence from Managers

Author

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  • David Huffman
  • Collin Raymond
  • Julia Shvets

Abstract

A long-standing puzzle is how overconfidence can persist in settings characterized by repeated feedback. This paper studies managers who participate repeatedly in a high-powered tournament incentive system, learning relative performance each time. Using reduced form and structural methods we find that (i) managers make overconfident predictions about future performance; (ii) managers have overly positive memories of past performance; (iii) the two phenomena are linked at an individual level. Our results are consistent with models of motivated beliefs in which individuals are motivated to distort memories of feedback and preserve unrealistic expectations.

Suggested Citation

  • David Huffman & Collin Raymond & Julia Shvets, 2022. "Persistent Overconfidence and Biased Memory: Evidence from Managers," American Economic Review, American Economic Association, vol. 112(10), pages 3141-3175, October.
    • Handle: RePEc:aea:aecrev:v:112:y:2022:i:10:p:3141-75
    DOI: 10.1257/aer.20190668
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    Cited by:

    1. Falk, Armin & Kosse, Fabian & Schildberg-Hörisch, Hannah & Zimmermann, Florian, 2023. "Self-assessment: The role of the social environment," Journal of Public Economics, Elsevier, vol. 223(C).
    2. Rustamdjan Hakimov & Renke Schmacker & Camille Terrier, 2023. "Confidence and College Applications: Evidence from a Randomized Intervention," Working Papers 962, Queen Mary University of London, School of Economics and Finance.
    3. Grunewald, Andreas & Klockmann, Victor & von Schenk, Alicia & von Siemens, Ferdinand, 2024. "Are biases contagious? The influence of communication on motivated beliefs," W.E.P. - Würzburg Economic Papers 109, University of Würzburg, Department of Economics.
    4. Michele Dell'Era & Luca David Opromolla & Luís Santos‐Pinto, 2023. "Can optimism solve the entrepreneurial earnings puzzle?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 125(1), pages 139-169, January.
    5. Andrea Amelio & Florian Zimmermann, 2023. "Motivated Memory in Economics—A Review," Games, MDPI, vol. 14(1), pages 1-15, January.
    6. Kiss, Andrea & Garlick, Robert & Orkin, Kate & Hensel, Lukas, 2023. "Jobseekers' Beliefs about Comparative Advantage and (Mis)Directed Search," IZA Discussion Papers 16522, Institute of Labor Economics (IZA).

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • M54 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Management

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