Persistent Overconfidence and Biased Memory: Evidence from Managers
- (pp. 3141-75)
Abstract
A long-standing puzzle is how overconfidence can persist in settings characterized by repeated feedback. This paper studies managers who participate repeatedly in a high-powered tournament incentive system, learning relative performance each time. Using reduced form and structural methods we find that (i) managers make overconfident predictions about future performance; (ii) managers have overly positive memories of past performance; (iii) the two phenomena are linked at an individual level. Our results are consistent with models of motivated beliefs in which individuals are motivated to distort memories of feedback and preserve unrealistic expectations.Citation
Huffman, David, Collin Raymond, and Julia Shvets. 2022. "Persistent Overconfidence and Biased Memory: Evidence from Managers." American Economic Review, 112 (10): 3141-75. DOI: 10.1257/aer.20190668Additional Materials
JEL Classification
- D82 Asymmetric and Private Information; Mechanism Design
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- J33 Compensation Packages; Payment Methods
- L25 Firm Performance: Size, Diversification, and Scope
- L81 Retail and Wholesale Trade; e-Commerce
- M52 Personnel Economics: Compensation and Compensation Methods and Their Effects
- M54 Personnel Economics: Labor Management