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Optimism bias, portfolio delegation, and economic welfare

Author

Listed:
  • Wang, Jian
  • Wang, Xiaoting
  • Zhuang, Xintian
  • Yang, Jun

Abstract

This study explores the effects of investor optimism bias in a portfolio delegation framework. We show that the optimistic investor increases his portfolio delegation, while the risk-averse manager reduces investment in the risky asset. The investor suffers welfare loss due to lower expected return, but the manager enjoys increased compensation. The investor’s optimism bias aggravates the moral hazard problem.

Suggested Citation

  • Wang, Jian & Wang, Xiaoting & Zhuang, Xintian & Yang, Jun, 2017. "Optimism bias, portfolio delegation, and economic welfare," Economics Letters, Elsevier, vol. 150(C), pages 111-113.
    • Handle: RePEc:eee:ecolet:v:150:y:2017:i:c:p:111-113
    DOI: 10.1016/j.econlet.2016.11.025
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    References listed on IDEAS

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    2. Harin, Alexander, 2021. "Behavioral economics. Forbidden zones. New method and models," MPRA Paper 106545, University Library of Munich, Germany.

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    More about this item

    Keywords

    Optimism bias; Portfolio delegation; Investment strategy; Economic welfare;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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