The Culture of Overconfidence
- (pp. 95-110)
Abstract
Perceptions 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 overconfident. This provides a novel perspective on how culture selects among equilibria: via higher-order beliefs.Citation
Bhaskar, V., and Caroline Thomas. 2019. "The Culture of Overconfidence." American Economic Review: Insights, 1 (1): 95-110. DOI: 10.1257/aeri.20180200Additional Materials
JEL Classification
- D82 Asymmetric and Private Information; Mechanism Design
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- Z13 Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification