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Rational Overoptimism (and Other Biases)

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  • Eric Van den Steen

Abstract

Rational agents with differing priors tend to be overoptimistic about their chances of success. In particular, an agent who tries to choose the action that is most likely to succeed, is more likely to choose an action of which he overestimated, rather than underestimated, the likelihood of success. After studying the comparative statics of this mechanism, I show that it also causes agents to attribute failure to exogenous factors but success to their own choice of action, to disproportionately believe that they will outperform others, to overestimate the precision of their estimates, and to overestimate their control over the outcome.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 94 (2004)
Issue (Month): 4 (September)
Pages: 1141-1151

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Handle: RePEc:aea:aecrev:v:94:y:2004:i:4:p:1141-1151

Note: DOI: 10.1257/0002828042002697
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  1. Olivier Compte & Andrew Postlewaite, 2004. "Confidence-Enhanced Performance," American Economic Review, American Economic Association, American Economic Association, vol. 94(5), pages 1536-1557, December.
  2. Markus K. Brunnermeier & Jonathan A. Parker, 2004. "Optimal Expectations," NBER Working Papers 10707, National Bureau of Economic Research, Inc.
  3. Harsanyi, John C., 1994. "Games with Incomplete Information," Nobel Prize in Economics documents, Nobel Prize Committee 1994-1, Nobel Prize Committee.
  4. John C. Harsanyi, 1968. "Games with Incomplete Information Played by `Bayesian' Players, Part III. The Basic Probability Distribution of the Game," Management Science, INFORMS, INFORMS, vol. 14(7), pages 486-502, March.
  5. Roland Bénabou & Jean Tirole, 2002. "Self-Confidence And Personal Motivation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(3), pages 871-915, August.
  6. Hvide, Hans K., 2002. "Pragmatic beliefs and overconfidence," Journal of Economic Behavior & Organization, Elsevier, vol. 48(1), pages 15-28, May.
  7. Brown, Keith C, 1974. "A Note on the Apparent Bias of Net Revenue Estimates for Capital Investment Projects," Journal of Finance, American Finance Association, American Finance Association, vol. 29(4), pages 1215-16, September.
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