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The Culture of Overconfidence†

The Culture of Overconfidence† AbstractPerceptions of overconfidence can exacerbate the tendency of reputationally concerned leaders to continue bad projects. Reputation concerns alone induce a bias toward inefficient continuation in a leader receiving information privately. When she is overconfident— or holds a more favorable prior than observers—this tendency is aggravated. This remains true even when she is not really overconfident, but merely perceived to be so. Higher-order beliefs regarding overconfidence induce inefficient equilibrium selection even when there is “almost common knowledge” that the leader is not over-confident. This provides a novel perspective on how culture selects among equilibria: via higher-order beliefs. (JEL D82, D83, Z13) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review: Insights American Economic Association

The Culture of Overconfidence†

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Publisher
American Economic Association
Copyright
Copyright © 2019 © American Economic Association
ISSN
2640-205X
eISSN
2640-2068
DOI
10.1257/aeri.20180200
Publisher site
See Article on Publisher Site

Abstract

AbstractPerceptions of overconfidence can exacerbate the tendency of reputationally concerned leaders to continue bad projects. Reputation concerns alone induce a bias toward inefficient continuation in a leader receiving information privately. When she is overconfident— or holds a more favorable prior than observers—this tendency is aggravated. This remains true even when she is not really overconfident, but merely perceived to be so. Higher-order beliefs regarding overconfidence induce inefficient equilibrium selection even when there is “almost common knowledge” that the leader is not over-confident. This provides a novel perspective on how culture selects among equilibria: via higher-order beliefs. (JEL D82, D83, Z13)

Journal

American Economic Review: InsightsAmerican Economic Association

Published: Jun 1, 2019

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