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On the Evolution of Overconfidence and Entrepreneurs

Antonio E. Bernardo
University of California, Los Angeles - Finance Area

Ivo Welch
Brown University - Department of Economics; National Bureau of Economic Research (NBER)

June 2001

Yale Cowles Foundation Discussion Paper No. 1307; Yale ICF Working Paper No. 00-48

Abstract:
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.

Keywords: Evolution, Overconfidence, Behavioral Economics

JEL Classifications: D7, L2

Working Paper Series

Date posted: July 16, 2001 ; Last revised: November 26, 2003

Suggested Citation

Bernardo, Antonio E. and Welch, Ivo, On the Evolution of Overconfidence and Entrepreneurs (June 2001). Yale Cowles Foundation Discussion Paper No. 1307; Yale ICF Working Paper No. 00-48. Available at SSRN: http://ssrn.com/abstract=275516

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Contact Information

Ivo Welch (Contact Author) Brown University - Department of Economics ( email ) 64 Waterman Street Providence, RI 02912 United States
National Bureau of Economic Research (NBER) 1050 Massachusetts Avenue Cambridge, MA 02138 United States
Antonio E. Bernardo University of California, Los Angeles - Finance Area ( email ) Los Angeles, CA 90095-1481 United States 310-825-2198 (Phone) 310-206-5455 (Fax)