American Economic Review: Vol. 94 No. 4 (September 2004)
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Rational Overoptimism (and Other Biases)
Van den Steen, Eric. 2004. "Rational Overoptimism (and Other Biases)." American Economic Review, 94(4): 1141-1151.
Rational agents with differing priors tend to be overoptimistic about their chances of success. In particular, an agent who tries to choose the action that is most likely to succeed, is more likely to choose an action of which he overestimated, rather than underestimated, the likelihood of success. After studying the comparative statics of this mechanism, I show that it also causes agents to attribute failure to exogenous factors but success to their own choice of action, to disproportionately believe that they will outperform others, to overestimate the precision of their estimates, and to overestimate their control over the outcome.
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Van den Steen, Eric