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Full-Text Articles in Social and Behavioral Sciences
On The Evolution Of Overconfidence And Entrepreneurs, Antonio E. Bernardo, Ivo Welch
On The Evolution Of Overconfidence And Entrepreneurs, Antonio E. Bernardo, Ivo Welch
Cowles Foundation Discussion Papers
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.
An Economic Approach To The Psychology Of Change: Amnesia, Inertia, And Impulsiveness, David Hirshleifer, Ivo Welch
An Economic Approach To The Psychology Of Change: Amnesia, Inertia, And Impulsiveness, David Hirshleifer, Ivo Welch
Cowles Foundation Discussion Papers
This paper models how imperfect memory affects the optimal continuity of policies. We examine the choices of a player (individual or firm) who observes previous actions but cannot remember the rationale for these actions. In a stable environment, the player optimally responds to memory loss with excess inertia, defined as a higher probability of following old policies than would occur under full recall. In a volatile environment, the player can exhibit excess impulsiveness (i.e., be more prone to follow new information signals). The model provides a memory-loss explanation for some documented psychological biases, implies that inertia and organizational routines should …