The Culture of Overconfidence

46 Pages Posted: 26 Feb 2018

See all articles by Venkataraman Bhaskar

Venkataraman Bhaskar

University of Texas at Austin

Caroline Thomas

University of Texas at Austin

Date Written: February 2018

Abstract

Why do political leaders or managers persist with their pet projects and policies despite bad news? When project continuation is a more informative experiment than project termination, a reputationally concerned leader is biased towards continuation, as it enables her to disclose her private information. Perceived overconfidence on the part of the leader aggravates this tendency, even when the leader is not, in fact, overconfident. Higher-order beliefs regarding overconfidence can induce inefficient equilibrium selection even when it is "almost common knowledge" that the leader is not overconfident. Thus, a culture where leaders are expected to be overconfident can have undesirable effects even upon leaders who have correct beliefs.

Keywords: Higher-order beliefs, Mis-specified models, Non-common priors, overconfidence, Policy persistence

JEL Classification: C73, D72, D82

Suggested Citation

Bhaskar, Venkataraman and Thomas, Caroline, The Culture of Overconfidence (February 2018). CEPR Discussion Paper No. DP12740, Available at SSRN: https://ssrn.com/abstract=3130179

Venkataraman Bhaskar (Contact Author)

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Caroline Thomas

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

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