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Abstract

This paper explains why seemingly irrational overconfident behavior can persist. Information aggregation is poor in groups in which most individuals herd. By ignoring the herd, the actions of overconfident individuals ("entrepreneurs") convey their private information. However, entrepreneurs make mistakes and thus die more frequently. The socially optimal proportion of entrepreneurs trades off the positive information externality against high attrition rates of entrepreneurs, and depends on the size of the group, on the degree of overconfidence, and on the accuracy of individuals' private information. The stationary distribution trades off the fitness of the group against the fitness of overconfident individuals. Copyright (c) 2001 Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 10 (2001)
Issue (Month): 3 (09)
Pages: 301-330

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Handle: RePEc:bla:jemstr:v:10:y:2001:i:3:p:301-330

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• D7 - Microeconomics - - Analysis of Collective Decision-Making
• L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

References

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1. Overconfidence
   by Peter Klein in Organizations and Markets on 2010-07-26 17:56:34

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