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On the Evolution of Overconfidence and Entrepreneurs

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  • Bernardo, Antonio
  • Welch, Ivo

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.

Suggested Citation

  • Bernardo, Antonio & Welch, Ivo, 1997. "On the Evolution of Overconfidence and Entrepreneurs," University of California at Los Angeles, Anderson Graduate School of Management qt6668s4pz, Anderson Graduate School of Management, UCLA.
    • Handle: RePEc:cdl:anderf:qt6668s4pz
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    References listed on IDEAS

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    Cited by:

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    2. Ana Espinola-Arredondo & Esther Gal-Or & Felix Munoz-Garcia, 2009. "When Should a Firm Expand Its Business? The Signaling Implications of Business Expansion," Working Papers 2008-16, School of Economic Sciences, Washington State University.

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