Overconfidence and Delegated Portfolio Management
45 Pages Posted: 27 Feb 2004
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Overconfidence and Delegated Portfolio Management
Date Written: February 2004
Abstract
Following extensive empirical evidence about 'market anomalies' and overconfidence, the analysis of financial markets with agents overconfident about the precision of their private information has received a lot of attention. All these models consider agents trading for their own account. In this article, we analyse a standard delegated portfolio management problem between a financial institution and a money manager who may be of two types: rational or overconfident. We consider several situations. In each case, we derive the optimal contract and results on the performance of financial institution hiring overconfident managers relative to institutions hiring rational agents, and results on the price impact of overconfidence.
Keywords: Overconfidence, optimal contract, risk-taking incentives
JEL Classification: D82, G11
Suggested Citation: Suggested Citation
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