Overconfidence, Subjective Perception and Pricing Behavior

46 Pages Posted: 11 Apr 2006 Last revised: 31 Jul 2010

See all articles by Pierpaolo Benigno

Pierpaolo Benigno

Luiss Guido Carli University; Einaudi Institute for Economics and Finance (EIEF)

Anastasios G. Karantounias

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Multiple version iconThere are 2 versions of this paper

Date Written: January 2006

Abstract

We study the implications of a particular form of irrationality on the pricing behavior of firms in a monopolistic-competitive market with incomplete information. We assume that firms are overconfident, meaning that they over-estimate their abilities to understand the correct model of the economy. However, we allow firms to obtain information by paying a fixed cost. We find two important implications: i) overconfident firms are less inclined to acquire information; ii) prices might exhibit excess volatility driven by non-fundamental disturbances. We use our model to match some facts related to recent empirical evidence on disaggregated price data for the US economy.

Suggested Citation

Benigno, Pierpaolo and Karantounias, Anastasios G., Overconfidence, Subjective Perception and Pricing Behavior (January 2006). NBER Working Paper No. w11922. Available at SSRN: https://ssrn.com/abstract=876025

Pierpaolo Benigno (Contact Author)

Luiss Guido Carli University

Viale Romania 32
Rome, Roma 00197
Italy

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

Anastasios G. Karantounias

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

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