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A Model of Overconfidence

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  • Weinberg, Bruce A.

    ()
    (Ohio State University)

Abstract

People use information about their ability to choose tasks. If more challenging tasks provide more accurate information about ability, people who care about and who are risk averse over their perception of their own ability will choose tasks that are not sufficiently challenging. Overestimation of ability raises utility by deluding people into believing that they are more able than they are in fact. Moderate overestimation of ability and overestimation of the precision of initial information leads people to choose tasks that raise expected output, however extreme overconfidence leads people to undertake tasks that are excessively challenging. Consistent with our results, psychologists have found that moderate overconfidence is both pervasive and advantageous and that people maintain such beliefs by underweighting new information about their ability.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4285.

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Length: 25 pages
Date of creation: Jul 2009
Date of revision:
Publication status: published in: Pacific Economic Review, 2009, 14(4), 502-515
Handle: RePEc:iza:izadps:dp4285

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Keywords: behavioral economics; information processing; overconfidence;

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References

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  1. Waldman, Michael, 1994. "Systematic Errors and the Theory of Natural Selection," American Economic Review, American Economic Association, American Economic Association, vol. 84(3), pages 482-97, June.
  2. Kyle, Albert S & Wang, F Albert, 1997. " Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?," Journal of Finance, American Finance Association, American Finance Association, vol. 52(5), pages 2073-90, December.
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Cited by:
  1. Filippin, Antonio & Paccagnella, Marco, 2012. "Family background, self-confidence and economic outcomes," Economics of Education Review, Elsevier, Elsevier, vol. 31(5), pages 824-834.
  2. Sällström, Susanna & Sjogren, Anna, 2002. "Trapped, Delayed and Handicapped," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3335, C.E.P.R. Discussion Papers.
  3. Heller, Yuval, 2010. "Overconfidence and risk dispersion," MPRA Paper 25893, University Library of Munich, Germany.
  4. Kuhnen, Camelia M. & Tymula, Agnieszka, 2008. "Rank expectations, feedback and social hierarchies," MPRA Paper 13428, University Library of Munich, Germany, revised Jan 2009.

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