Overconfidence by Bayesian-Rational Agents
This paper derives two mechanisms through which Bayesian-rational individuals with differing priors will tend to be relatively overconfident about their estimates and predictions, in the sense of overestimating the precision of these estimates. The intuition behind one mechanism is slightly ironic: In trying to update optimally, Bayesian agents overweight information of which they overestimate the precision and underweight in the opposite case. This causes overall an overestimation of the precision of the final estimate, which tends to increase as agents get more data. This paper was accepted by Teck Ho, decision analysis.
Volume (Year): 57 (2011)
Issue (Month): 5 (May)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
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.:
- John Geanakoplos, 2009. "The Leverage Cycle," Cowles Foundation Discussion Papers 1715, Cowles Foundation for Research in Economics, Yale University.
- Jonathan A. Parker & Markus K. Brunnermeier, 2004.
Econometric Society 2004 North American Winter Meetings
426, Econometric Society.
- Markus K. Brunnermeier & Jonathan A. Parker, 2002. "Optimal expectations," LSE Research Online Documents on Economics 24954, London School of Economics and Political Science, LSE Library.
- Jonathan Parker & Markus K Brunnermeier, 2002. "Optimal Expectations," FMG Discussion Papers dp434, Financial Markets Group.
- Markus K. Brunnermeier & Jonathan A. Parker, 2002. "Optimal Expectations," Working Papers 146, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics.
- Markus K. Brunnermeier & Jonathan A. Parker, 2004. "Optimal Expectations," NBER Working Papers 10707, National Bureau of Economic Research, Inc.
- Brunnermeier, Markus K & Parker, Jonathan A, 2004. "Optimal Expectation," CEPR Discussion Papers 4656, C.E.P.R. Discussion Papers.
- Morris, Stephen, 1994. "Trade with Heterogeneous Prior Beliefs and Asymmetric Information," Econometrica, Econometric Society, vol. 62(6), pages 1327-47, November.
- Faruk Gul, 1998. "A Comment on Aumann's Bayesian View," Econometrica, Econometric Society, vol. 66(4), pages 923-928, July.
- Hong, Harrison & Stein, Jeremy, 2007.
"Disagreement and the Stock Market,"
2894690, Harvard University Department of Economics.
- Morris, Stephen, 1995. "The Common Prior Assumption in Economic Theory," Economics and Philosophy, Cambridge University Press, vol. 11(02), pages 227-253, October.
- Boot, Arnoud W A & Gopalan, Radhakrishnan & Thakor, Anjan, 2006.
"Market Liquidity, Investor Participation and Managerial Autonomy: Why Do Firms Go Private?,"
CEPR Discussion Papers
5510, C.E.P.R. Discussion Papers.
- Arnoud W. A. Boot & Radhakrishnan Gopalan & Anjan V. Thakor, 2008. "Market Liquidity, Investor Participation, and Managerial Autonomy: Why Do Firms Go Private?," Journal of Finance, American Finance Association, vol. 63(4), pages 2013-2059, 08.
- Arnoud W.A. Boot & Radhakrishnan Gopaian & Anjan V. Thakor, 2006. "Market Liquidity, Investor Participation and Managerial Autonomy: Why do Firms go Private?," Tinbergen Institute Discussion Papers 06-011/2, Tinbergen Institute.
- Daron Acemoglu & Victor Chernozhukov & Muhamet Yildiz, 2006.
"Learning and Disagreement in an Uncertain World,"
NBER Working Papers
12648, National Bureau of Economic Research, Inc.
- Kent D. Daniel, 2001. "Overconfidence, Arbitrage, and Equilibrium Asset Pricing," Journal of Finance, American Finance Association, vol. 56(3), pages 921-965, 06.
- Michael D. Grubb, 2009.
"Selling to Overconfident Consumers,"
American Economic Review,
American Economic Association, vol. 99(5), pages 1770-1807, December.
- J. Michael Harrison & David M. Kreps, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 92(2), pages 323-336.
- Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
- K. J. Arrow, 1964. "The Role of Securities in the Optimal Allocation of Risk-bearing," Review of Economic Studies, Oxford University Press, vol. 31(2), pages 91-96.
- Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
- Robert J. Aumann, 1998. "Common Priors: A Reply to Gul," Econometrica, Econometric Society, vol. 66(4), pages 929-938, July.
- Eric Van den Steen, 2004. "Rational Overoptimism (and Other Biases)," American Economic Review, American Economic Association, vol. 94(4), pages 1141-1151, September.
- Aumann, Robert & Brandenburger, Adam, 1995.
"Epistemic Conditions for Nash Equilibrium,"
Econometric Society, vol. 63(5), pages 1161-80, September.
- Shimon Kogan, 2009. "Distinguishing the Effect of Overconfidence from Rational Best-Response on Information Aggregation," Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1889-1914, May.
- Thomas S. Wallsten & David V. Budescu & Rami Zwick, 1993. "Comparing the Calibration and Coherence of Numerical and Verbal Probability Judgments," Management Science, INFORMS, vol. 39(2), pages 176-190, February.
- Matthew Rabin & Joel L. Schrag, 1999. "First Impressions Matter: A Model of Confirmatory Bias," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 37-82.
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:57:y:2011:i:5:p:884-896. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If references are entirely missing, you can add them using this form.