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On the Evolution of Overconfidence and Entrepreneurs

  • Antonio Bernardo
  • Ivo Welch

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.

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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm211.

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Date of creation: 01 Jul 2001
Date of revision: 01 Nov 2003
Handle: RePEc:ysm:somwrk:ysm211
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  1. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  2. Abarbanell, Jeffrey S & Bernard, Victor L, 1992. " Tests of Analysts' Overreaction/Underreaction to Earnings Information as an Explanation for Anomalous Stock Price Behavior," Journal of Finance, American Finance Association, vol. 47(3), pages 1181-207, July.
  3. Jack Hirshleifer, 1977. "Economics from a Biological Viewpoint," UCLA Economics Working Papers 087, UCLA Department of Economics.
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  7. Wang, F. Albert, 2001. "Overconfidence, Investor Sentiment, and Evolution," Journal of Financial Intermediation, Elsevier, vol. 10(2), pages 138-170, April.
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  9. KENT D. DANIEL & David Hirshleifer & AVANIDHAR SUBRAHMANYAM, 2004. "A Theory of Overconfidence, Self-Attribution, and Security Market Under- and Over-reactions," Finance 0412006, EconWPA.
  10. Manove, M., 1995. "Entrepreneurs, Optimism, and the Competitive Edge," UFAE and IAE Working Papers 296.95, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  11. Bradford Cornell & Richard Roll, 1981. "Strategies for Pairwise Competition in Markets and Organizations," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 201-213, Spring.
  12. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1991. "The Survival of Noise Traders in Financial Markets," Scholarly Articles 3725470, Harvard University Department of Economics.
  13. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
  14. Hirshleifer, David & Luo, Guo Ying, 2000. "On the Survival of Overconfident Traders in a Competitive Securities Market," MPRA Paper 15347, University Library of Munich, Germany.
  15. J. Maynard Smith, 2010. "The Theory of Games and Evolution of Animal Conflicts," Levine's Working Paper Archive 448, David K. Levine.
  16. Busenitz, Lowell W. & Barney, Jay B., 1997. "Differences between entrepreneurs and managers in large organizations: Biases and heuristics in strategic decision-making," Journal of Business Venturing, Elsevier, vol. 12(1), pages 9-30, January.
  17. Welch, Ivo, 1992. " Sequential Sales, Learning, and Cascades," Journal of Finance, American Finance Association, vol. 47(2), pages 695-732, June.
  18. Jorgen W. Weibull, 1997. "Evolutionary Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262731215, June.
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  21. repec:tpr:qjecon:v:107:y:1992:i:3:p:797-817 is not listed on IDEAS
  22. Waldman, Michael, 1994. "Systematic Errors and the Theory of Natural Selection," American Economic Review, American Economic Association, vol. 84(3), pages 482-97, June.
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