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The culture of overconfidence

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  • Bhaskar, Venkataraman
  • Thomas, Caroline

Abstract

Why do political leaders or managers persist with their pet projects and policies despite bad news? When project continuation is a more informative experiment than project termination, a reputationally concerned leader is biased towards continuation, as it enables her to disclose her private information. Perceived overconfidence on the part of the leader aggravates this tendency, even when the leader is not, in fact, overconfident. Higher-order beliefs regarding overconfidence can induce inefficient equilibrium selection even when it is ``almost common knowledge" that the leader is not overconfident. Thus, a culture where leaders are expected to be overconfident can have undesirable effects even upon leaders who have correct beliefs.

Suggested Citation

  • Bhaskar, Venkataraman & Thomas, Caroline, 2018. "The culture of overconfidence," CEPR Discussion Papers 12740, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12740
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    Cited by:

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    2. Thomas, Caroline, 2019. "Experimentation with reputation concerns – Dynamic signalling with changing types," Journal of Economic Theory, Elsevier, vol. 179(C), pages 366-415.

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    More about this item

    Keywords

    Overconfidence; Policy persistence; Mis-specified models; Non-common priors; Higher-order beliefs;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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