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On the Evolution of Overconfidence and Entrepreneurs

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  • Antonio Bernardo
  • Ivo Welch

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.

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File URL: http://icfpub.som.yale.edu/publications/2416
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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm211.

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Date of creation: 01 Jul 2001
Date of revision: 01 Nov 2003
Handle: RePEc:ysm:somwrk:ysm211

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Web page: http://icf.som.yale.edu/
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Keywords: Evolution; Overconfidence; Behavioral Economics;

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