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Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?

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Author Info
 Kyle, Albert S
Wang, F Albert
Abstract

In a duopoly model of informed speculation, the authors show that overconfidence may strictly dominate rationality since an overconfident trader may not only generate higher expected profit and utility than his rational opponent but also higher than if he were also rational. This occurs because overconfidence acts like a commitment device in a standard Cournot duopoly. As a result, for some parameter values the Nash equilibrium of a two-fund game is a prisoner's dilemma in which both funds hire overconfident managers. Thus, overconfidence can persist and survive in the long run. Copyright 1997 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 52 (1997)
Issue (Month): 5 (December)
Pages: 2073-90
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Handle: RePEc:bla:jfinan:v:52:y:1997:i:5:p:2073-90

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  1. Dittrich, Dennis & Gueth, Werner & Maciejovsky, Boris, 2001. "Overconfidence in Investment Decisions: An Experimental Approach," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  2. Paul J. Ferraro, 2005. "Know Thyself: Incompetence and Overconfidence," Framed Field Experiments 0025, The Field Experiments Website. [Downloadable!]
  3. Thomas Norman, 2004. "Dynamically Stable Preferences," Economics Series Working Papers 207, University of Oxford, Department of Economics. [Downloadable!]
  4. Richard Deaves & Erik Lüders & Michael Schröder, 2005. "The dynamics of overconfidence: Evidence from stock market forecasters," CoFE Discussion Paper 05-10, Center of Finance and Econometrics, University of Konstanz. [Downloadable!]
  5. Glaser, Markus & Weber, Martin, 2005. "Overconfidence and Trading Volume," SIFR Research Report Series 40, Institute for Financial Research. [Downloadable!]
  6. Hirshleifer, David & Subrahmanyam, Avanidhar & Titman, Sheridan, 2004. "Feedback and the Success of Irrational Investors," Working Paper Series 2004-8, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
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  7. Fabrice Rousseau & Laurent Germain & Fabrice Rousseau & Anne Vanhems, 2008. "Irrational Financial Markets," Economics, Finance and Accounting Department Working Paper Series n1870108.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth. [Downloadable!]
  8. HEIFETZ, Aviad & SHANNON, Chris & SPIEGEL, Yossi, 2003. "What to maximize if you must," CORE Discussion Papers 2003047, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
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