Rational Laymen Versus Over-Confident Experts: Who Survives in the Long-Run?
37 Pages Posted: 14 Mar 2006
Date Written: March 1, 2006
In this paper we study the equilibrium in a heterogeneous economy with two groups of investors. Over-confident experts incorrectly assume that their signal for the drift of the dividend process is correlated with the true drift, but interpret the signal otherwise perfectly. Rational laymen avoid the experts' error, but their signal is noisier than that received by the experts. We investigate which of these two problems is more severe by computing long-run equilibrium consumption shares for the two groups. Our results indicate that overconfidence might be a more serious problem than limited information processing capability.
Keywords: General Equilibrium, Asset Allocation, Learning, Different Beliefs, Overconfidence
JEL Classification: G11, G12
Suggested Citation: Suggested Citation