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On the Evolution of Overconfidence and Entrepreneurs

Author

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  • Antonio Bernardo
  • Ivo Welch

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

  • Antonio Bernardo & Ivo Welch, 2001. "On the Evolution of Overconfidence and Entrepreneurs," Yale School of Management Working Papers ysm211, Yale School of Management, revised 01 Nov 2003.
  • Handle: RePEc:ysm:somwrk:ysm211
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    File URL: http://icfpub.som.yale.edu/publications/2416
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    References listed on IDEAS

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    More about this item

    Keywords

    Evolution; Overconfidence; Behavioral Economics;

    JEL classification:

    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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