Implications of Overconfidence on Information Investment

60 Pages Posted: 19 Sep 2017 Last revised: 23 Oct 2017

See all articles by Marcelo Fernandez

Marcelo Fernandez

California Institute of Technology - Division of the Humanities and Social Sciences, Students

Tatiana Mayskaya

National Research University Higher School of Economics - International College of Economics and Finance; National Research University Higher School of Economics - Faculty of Economics

Date Written: October 22, 2017

Abstract

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

Fernandez, Marcelo and Mayskaya, Tatiana, Implications of Overconfidence on Information Investment (October 22, 2017). Available at SSRN: https://ssrn.com/abstract=3038356 or http://dx.doi.org/10.2139/ssrn.3038356

Marcelo Fernandez

California Institute of Technology - Division of the Humanities and Social Sciences, Students ( email )

CA
United States

Tatiana Mayskaya (Contact Author)

National Research University Higher School of Economics - International College of Economics and Finance ( email )

Pokrovski Bulvar 11, Korpus Zh, Office 715
Moscow, 109028
Russia

National Research University Higher School of Economics - Faculty of Economics ( email )

Shabolovka 26
Moscow, 119049
Russia

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