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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Brunnermeier, Markus K & Parker, Jonathan A, 2004.
"Optimal Expectation,"
CEPR Discussion Papers
4656, C.E.P.R. Discussion Papers.
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Markus K. Brunnermeier & Jonathan A. Parker, 2004.
"Optimal Expectations,"
NBER Working Papers
10707, National Bureau of Economic Research, Inc.
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Markus K. Brunnermeier & Jonathan A. Parker, 2002.
"Optimal Expectations,"
Working Papers
146, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
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Markus K. Brunnermeier & Jonathan A. Parker, 2005.
"Optimal Expectations,"
American Economic Review,
American Economic Association, vol. 95(4), pages 1092-1118, September.
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Olivier Compte & Andrew Postlewaite, 2001.
"Confidence-Enhanced Performance,"
PIER Working Paper Archive
04-023, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 May 2003.
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Albert Banal-Estañol & Jo Seldeslachts, 2005.
"Merger Failures,"
CIG Working Papers
SP II 2005-09, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
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