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On the Evolution of Overconfidence and Entrepreneurs
Author(s) -
Bernardo Antonio E.,
Welch Ivo
Publication year - 2001
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1430-9134.2001.00301.x
Subject(s) - overconfidence effect , attrition , irrational number , externality , private information retrieval , information aggregation , herd , herd behavior , economics , microeconomics , psychology , social psychology , mathematics , geography , ecology , statistics , medicine , geometry , dentistry , biology , computer science , forestry , data mining , herding
This paper explains why seemingly irrational overconfident behavior can persist. Information aggregation is poor in groups in which most individuals herd. By ignoring the herd, the actions of overconfident individuals (“entrepreneurs”) convey their private information. However, entrepreneurs make mistakes and thus die more frequently. The socially optimal proportion of entrepreneurs trades off the positive information externality against high attrition rates of entrepreneurs, and depends on the size of the group, on the degree of overconfidence, and on the accuracy of individuals' private information. The stationary distribution trades off the fitness of the group against the fitness of overconfident individuals.