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Overconfidence and Delegated Portfolio Management

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Author Info
Palomino, Frédéric
Sadrieh, Abdolkarim

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Abstract

Following extensive empirical evidence about ‘market anomalies’ and overconfidence, the analysis of financial markets with agents overconfident about the precision of their private information has received a lot of attention. All these models consider agents trading for their own account. In this article, we analyse a standard delegated portfolio management problem between a financial institution and a money manager who may be of two types: rational or overconfident. We consider several situations. In each case, we derive the optimal contract and results on the performance of financial institution hiring overconfident managers relative to institutions hiring rational agents, and results on the price impact of overconfidence.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4231.

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Date of creation: Feb 2004
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Handle: RePEc:cpr:ceprdp:4231

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Related research
Keywords: optimal contract; overconfidence; risk-taking incentives;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Dow, James & Gorton, Gary, 1997. "Noise Trading, Delegated Portfolio Management, and Economic Welfare," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1024-50, October.
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  2. Palomino, Frederic & Prat, Andrea, 2003. " Risk Taking and Optimal Contracts for Money Managers," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 113-37, Spring.
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  3. Palomino, Frederic, 1996. " Noise Trading in Small Markets," Journal of Finance, American Finance Association, vol. 51(4), pages 1537-50, September. [Downloadable!] (restricted)
  4. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
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  5. Peter Diamond, 1998. "Managerial Incentives: On the Near Linearity of Optimal Compensation," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 931-957, October. [Downloadable!] (restricted)
  6. Kent D. Daniel, 2001. "Overconfidence, Arbitrage, and Equilibrium Asset Pricing," Journal of Finance, American Finance Association, vol. 56(3), pages 921-965, 06. [Downloadable!] (restricted)
  7. KENT D. DANIEL & David Hirshleifer & AVANIDHAR SUBRAHMANYAM, 2004. "A Theory of Overconfidence, Self-Attribution, and Security Market Under- and Over-reactions," Finance 0412006, EconWPA. [Downloadable!]
  8. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December. [Downloadable!] (restricted)
  9. Benos, Alexandros V., 1998. "Aggressiveness and survival of overconfident traders," Journal of Financial Markets, Elsevier, vol. 1(3-4), pages 353-383, September. [Downloadable!] (restricted)
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This page was last updated on 2009-11-25.

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