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Overconfidence and Occupational Choice

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  • Edward P. Lazear

Abstract

A statistical theory of overconfidence is proposed and applied to the issue of occupational choice. Individuals who can choose whether to engage in an activity or not must estimate their performance. The estimates have error and that error has positive expectation among those who engage in the activity. As a result, an unbiased ex ante estimate of performance in an occupatoin results in an ex post biased estimate of ability among those enter. The statistical theory of overconfidence provides a number of testable implications, most significant of which is that overconfidence should be more prevalent in occupations where estimates of ability are noisier. This and other implications are tested and found to hold using the Current Population Survey and Panel Study of Income Dynamics data.

Suggested Citation

  • Edward P. Lazear, 2016. "Overconfidence and Occupational Choice," NBER Working Papers 21921, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21921
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    Cited by:

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    2. Naijia Guo & Charles Ka Yui Leung, 2021. "Do elite colleges matter? The impact on entrepreneurship decisions and career dynamics," Quantitative Economics, Econometric Society, vol. 12(4), pages 1347-1397, November.

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    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • J0 - Labor and Demographic Economics - - General
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics
    • M50 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - General
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions

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