On the Evolution of Overconfidence and Entrepreneurs

53 Pages Posted: 16 Jul 2001  

Antonio E. Bernardo

University of California, Los Angeles (UCLA) - Finance Area

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2001

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 Classification: D7, L2

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: https://ssrn.com/abstract=275516

Antonio E. Bernardo

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-2198 (Phone)
310-206-5455 (Fax)

Ivo Welch (Contact Author)

University of California, Los Angeles (UCLA) ( email )

110 Westwood Plaza
C519
Los Angeles, CA 90095-1481
United States
310-825-2508 (Phone)

HOME PAGE: http://www.ivo-welch.info

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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