Implications of Overconfidence on Information Investment
60 Pages Posted: 19 Sep 2017 Last revised: 23 Oct 2017
Date Written: October 22, 2017
We present a dynamic model that illustrates three forces that shape the effect of overconfidence (overprecision of consumed information) on the amount of collected information. The first force comes from overestimating the precision of the next consumed piece of information. The second force is related to overestimating the precision of already collected information. The third force reflects the discrepancy between how much information the agent expects to collect and how much information he actually collects in expectation. The first force pushes an overconfident agent to collect more information, while the second and the third forces work in the other direction.
Keywords: Bounded Rationality, Information Acquisition, Overconfidence
JEL Classification: D83, D91
Suggested Citation: Suggested Citation