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The Culture of Overconfidence

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  • V. Bhaskar
  • Caroline Thomas

Abstract

Perceptions of overconfidence can exacerbate the tendency of reputationally concerned leaders to continue bad projects. Reputation concerns alone induce a bias toward inefficient continuation in a leader receiving information privately. When she is overconfident—or holds a more favorable prior than observers—this tendency is aggravated. This remains true even when she is not really overconfident, but merely perceived to be so. Higher-order beliefs regarding overconfidence induce inefficient equilibrium selection even when there is "almost common knowledge" that the leader is not overconfident. This provides a novel perspective on how culture selects among equilibria: via higher-order beliefs.

Suggested Citation

  • V. Bhaskar & Caroline Thomas, 2019. "The Culture of Overconfidence," American Economic Review: Insights, American Economic Association, vol. 1(1), pages 95-110, June.
    • Handle: RePEc:aea:aerins:v:1:y:2019:i:1:p:95-110
    Note: DOI: 10.1257/aeri.20180200
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    Cited by:

    1. Thomas, Caroline, 2019. "Experimentation with reputation concerns – Dynamic signalling with changing types," Journal of Economic Theory, Elsevier, vol. 179(C), pages 366-415.
    2. Danz, David, 2020. "Never underestimate your opponent: Hindsight bias causes overplacement and overentry into competition," Games and Economic Behavior, Elsevier, vol. 124(C), pages 588-603.

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    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
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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