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Over-Confidence, Shame and Investments

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  • Dessi, Roberta
  • Zhao, Xiaojian

Abstract

The available evidence from numerous studies suggests that overconfidence is a more important phenomenon in North America than in Japan. The pattern is reversed for shame, which appears to play a more important role among Japanese than North Americans. We develop a model that endogenizes these differences and examines their economic consequences. In addition, it yields novel implications for differences in overconfidence and behavior within countries. A crucial tradeoff arises in the model between the benefits of encouraging improvement on existing activities and the benefits of promoting initiative and investment in new activities. Overconfidence and high sensitivity to shame emerge as substitute mechanisms to induce efficient investment decisions, generating a "North American" equilibrium with overconfidence and low sensitivity to shame, and a "Japanese" equilibrium with high sensitivity to shame and no overconfidence. The analysis identifies the costs as well as bene fits of reliance on each mechanism, and welfare implications.

Suggested Citation

  • Dessi, Roberta & Zhao, Xiaojian, 2014. "Over-Confidence, Shame and Investments," IDEI Working Papers 838, Institut d'Économie Industrielle (IDEI), Toulouse.
  • Handle: RePEc:ide:wpaper:28617
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    References listed on IDEAS

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    1. Ran Abramitzky & Leah Platt Boustan & Katherine Eriksson, 2012. "Europe's Tired, Poor, Huddled Masses: Self-Selection and Economic Outcomes in the Age of Mass Migration," American Economic Review, American Economic Association, vol. 102(5), pages 1832-1856, August.
    2. Filippin, Antonio & Paccagnella, Marco, 2012. "Family background, self-confidence and economic outcomes," Economics of Education Review, Elsevier, vol. 31(5), pages 824-834.
    3. Ross Levine & Yona Rubinstein, 2013. "Smart and Illicit: Who Becomes an Entrepreneur and Does it Pay?," CEP Discussion Papers dp1237, Centre for Economic Performance, LSE.
    4. B. Douglas Bernheim & Antonio Rangel, 2009. "Beyond Revealed Preference: Choice-Theoretic Foundations for Behavioral Welfare Economics," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 51-104.
    5. Moriguchi, Chiaki & Ono, Hiroshi, 2004. "Japanese Lifetime Employment: A Century's Perspective," EIJS Working Paper Series 205, Stockholm School of Economics, The European Institute of Japanese Studies.
    6. Bernheim, B Douglas, 1994. "A Theory of Conformity," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 841-877, October.
    7. Wood, Stacy L & Lynch, John G, Jr, 2002. " Prior Knowledge and Complacency in New Product Learning," Journal of Consumer Research, Oxford University Press, vol. 29(3), pages 416-426, December.
    8. Gottlieb, Daniel, 2014. "Imperfect memory and choice under risk," Games and Economic Behavior, Elsevier, vol. 85(C), pages 127-158.
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    More about this item

    Keywords

    Overconfidence; shame; investment; cultural differences; cross-sectional differences; memory; cultural transmission;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • Z1 - Other Special Topics - - Cultural Economics

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