Author
Listed:
- Antonio Bernardo
- Ivo Welch
AbstractThis 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.
Suggested Citation
Antonio Bernardo & Ivo Welch, 2001.
"On the Evolution of Overconfidence and Entrepreneurs,"
Yale School of Management Working Papers
ysm211, Yale School of Management, revised 01 Nov 2003.
Handle:
RePEc:ysm:somwrk:ysm211
Download full text from publisher
Other versions of this item:
- Antonio E. Bernardo & Ivo Welch, 2001.
"On the Evolution of Overconfidence and Entrepreneurs,"
Cowles Foundation Discussion Papers
1307, Cowles Foundation for Research in Economics, Yale University.
- Bernardo, Antonio & Welch, Ivo, 1997.
"On the Evolution of Overconfidence and Entrepreneurs,"
University of California at Los Angeles, Anderson Graduate School of Management
qt6668s4pz, Anderson Graduate School of Management, UCLA.
- Antonio Bernardo & Ivo Welch, 2001.
"On the Evolution of Overconfidence and Entrepreneurs,"
Yale School of Management Working Papers
ysm211, Yale School of Management, revised 01 Nov 2003.
References listed on IDEAS
- Terrance Odean., 1996.
"Volume, Volatility, Price and Profit When All Trader Are Above Average,"
Research Program in Finance Working Papers
RPF-266, University of California at Berkeley.
- Hirshleifer, David & Luo, Guo Ying, 2001.
"On the survival of overconfident traders in a competitive securities market,"
Journal of Financial Markets, Elsevier, vol. 4(1), pages 73-84, January.
- Patrick Bolton & Christopher Harris, 1999.
"Strategic Experimentation,"
Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
- Jorgen W. Weibull, 1997.
"Evolutionary Game Theory,"
MIT Press Books,
The MIT Press,
edition 1, volume 1, number 0262731215, December.
- Hirshlifer, David & Rassmusen, Eric, 1989.
"Cooperation in a repeated prisoners' dilemma with ostracism,"
Journal of Economic Behavior & Organization, Elsevier, vol. 12(1), pages 87-106, August.
- Rogers, Alan R, 1994.
"Evolution of Time Preference by Natural Selection,"
American Economic Review, American Economic Association, vol. 84(3), pages 460-481, June.
- Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992.
"A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades,"
Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
- Cooper, Arnold C. & Woo, Carolyn Y. & Dunkelberg, William C., 1988.
"Entrepreneurs' perceived chances for success,"
Journal of Business Venturing, Elsevier, vol. 3(2), pages 97-108.
- Anderson, Lisa R & Holt, Charles A, 1997.
"Information Cascades in the Laboratory,"
American Economic Review, American Economic Association, vol. 87(5), pages 847-862, December.
- Welch, Ivo, 1992.
"Sequential Sales, Learning, and Cascades,"
Journal of Finance, American Finance Association, vol. 47(2), pages 695-732, June.
- Eshel, I. & Samuelson, L. & Shaked, A., 1996.
"Altruists, Egoists and Hooligans in a Local Interaction Model,"
Working papers
9612, Wisconsin Madison - Social Systems.
- Abarbanell, Jeffrey S & Bernard, Victor L, 1992.
"Tests of Analysts' Overreaction/Underreaction to Earnings Information as an Explanation for Anomalous Stock Price Behavior,"
Journal of Finance, American Finance Association, vol. 47(3), pages 1181-1207, July.
- De Long, J Bradford & Shleifer, Andrei & Summers, Lawrence H & Waldmann, Robert J, 1991.
"The Survival of Noise Traders in Financial Markets,"
The Journal of Business, University of Chicago Press, vol. 64(1), pages 1-19, January.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann,, "undated".
"The Survival of Noise Traders in Financial Markets,"
J. Bradford De Long's Working Papers
_123, University of California at Berkeley, Economics Department.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1988.
"The Survival of Noise Traders in Financial Markets,"
NBER Working Papers
2715, National Bureau of Economic Research, Inc.
- De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1991.
"The Survival of Noise Traders in Financial Markets,"
Scholarly Articles
3725470, Harvard University Department of Economics.
- Hirshleifer, Jack, 1977.
"Economics from a Biological Viewpoint,"
Journal of Law and Economics, University of Chicago Press, vol. 20(1), pages 1-52, April.
- Wang, F. Albert, 2001.
"Overconfidence, Investor Sentiment, and Evolution,"
Journal of Financial Intermediation, Elsevier, vol. 10(2), pages 138-170, April.
- Ilan Eshel & Larry Samuelson & Avner Shaked, "undated".
"Altruists Egoists and Hooligans in a Local Interaction Model,"
ELSE working papers
005, ESRC Centre on Economics Learning and Social Evolution.
- Manove, M., 1995.
"Entrepreneurs, Optimism, and the Competitive Edge,"
UFAE and IAE Working Papers
296.95, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- KENT D. DANIEL & David Hirshleifer & AVANIDHAR SUBRAHMANYAM, 2004.
"A Theory of Overconfidence, Self-Attribution, and Security Market Under- and Over-reactions,"
Finance
0412006, University Library of Munich, Germany.
- Eshel, Ilan & Samuelson, Larry & Shaked, Avner, 1998.
"Altruists, Egoists, and Hooligans in a Local Interaction Model,"
American Economic Review, American Economic Association, vol. 88(1), pages 157-179, March.
- Abhijit V. Banerjee, 1992.
"A Simple Model of Herd Behavior,"
The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 797-817.
- Bradford Cornell & Richard Roll, 1981.
"Strategies for Pairwise Competition in Markets and Organizations,"
Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 201-213, Spring.
- Becker, Gary S, 1976.
"Altruism, Egoism, and Genetic Fitness: Economics and Sociobiology,"
Journal of Economic Literature, American Economic Association, vol. 14(3), pages 817-826, September.
- Jack Hirshleifer & Juan Carlos Martinez Coll, 1988.
"What Strategies Can Support the Evolutionary Emergence of Cooperation?,"
Journal of Conflict Resolution, Peace Science Society (International), vol. 32(2), pages 367-398, June.
- Busenitz, Lowell W. & Barney, Jay B., 1997.
"Differences between entrepreneurs and managers in large organizations: Biases and heuristics in strategic decision-making,"
Journal of Business Venturing, Elsevier, vol. 12(1), pages 9-30, January.
- Waldman, Michael, 1994.
"Systematic Errors and the Theory of Natural Selection,"
American Economic Review, American Economic Association, vol. 84(3), pages 482-497, June.
- Jianbo Zhang, 1997.
"Strategic Delay and the Onset of Investment Cascades,"
RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 188-205, Spring.
- Terrance Odean, 1998.
"Volume, Volatility, Price, and Profit When All Traders Are Above Average,"
Journal of Finance, American Finance Association, vol. 53(6), pages 1887-1934, December.
- J. Maynard Smith, 2010.
"The Theory of Games and Evolution of Animal Conflicts,"
Levine's Working Paper Archive
448, David K. Levine.
Full references (including those not matched with items on IDEAS)
Most related items
These are the items that most often cite the same works as this one and are cited by the same works as this one.
- Markus Noth & Martin Weber, 2003.
"Information Aggregation with Random Ordering: Cascades and Overconfidence,"
Economic Journal, Royal Economic Society, vol. 113(484), pages 166-189, January.
- Nöth, Markus & Weber, Martin, 2000.
"Information Aggregation with Random Ordering: Cascades and Overconfidence,"
Sonderforschungsbereich 504 Publications
00-34, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
- Markus Noeth & Martin Weber, 2000.
"Information Aggregation with Random Ordering: Cascades and Overconfidence,"
Econometric Society World Congress 2000 Contributed Papers
1592, Econometric Society.
- Nöth, Markus & Weber, Martin, 2000.
"Information aggregation with random ordering : cascades and overconficence,"
Papers
00-34, Sonderforschungsbreich 504.
- Thomas J. Brennan & Andrew W. Lo & Ruixun Zhang, 2018.
"Variety Is the Spice of Life: Irrational Behavior as Adaptation to Stochastic Environments,"
Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 1-39, September.
- Cao, H. Henry & Han, Bing & Hirshleifer, David, 2011.
"Taking the road less traveled by: Does conversation eradicate pernicious cascades?,"
Journal of Economic Theory, Elsevier, vol. 146(4), pages 1418-1436, July.
- David Hirshleifer, 2001.
"Investor Psychology and Asset Pricing,"
Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, August.
- John Conley & Myrna H. Wooders & Ali Toossi, 2001.
"Evolution & Voting: How Nature Makes us Public Spirited,"
Economics Bulletin, AccessEcon, vol. 28(24), pages 1.
- Conley, John P. & Toossi, Ali & Wooders, Myrna, 2001.
"Evolution & Voting: How Nature Makes us Public Spirited,"
Economic Research Papers
269371, University of Warwick - Department of Economics.
- Conley, John P. & Toossi, Ali & Wooders, Myrna, 2001.
"Evolution & voting : how nature makes us public spirited,"
The Warwick Economics Research Paper Series (TWERPS)
601, University of Warwick, Department of Economics.
- Kenneth Yung & Yen-Chih Liu, 2009.
"Implications of futures trading volume: Hedgers versus speculators,"
Journal of Asset Management, Palgrave Macmillan, vol. 10(5), pages 318-337, December.
- Diego García & Francesco Sangiorgi & Branko Urošević, 2007.
"Overconfidence and Market Efficiency with Heterogeneous Agents,"
Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 30(2), pages 313-336, February.
- Andrew W. Lo & H. Allen Orr & Ruixun Zhang, 2018.
"The growth of relative wealth and the Kelly criterion,"
Journal of Bioeconomics, Springer, vol. 20(1), pages 49-67, April.
- Caliendo, Frank & Huang, Kevin X.D., 2008.
"Overconfidence and consumption over the life cycle,"
Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1347-1369, December.
- Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002.
"Investor psychology in capital markets: evidence and policy implications,"
Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
- Cary Frydman & Ian Krajbich, 2022.
"Using Response Times to Infer Others’ Private Information: An Application to Information Cascades,"
Management Science, INFORMS, vol. 68(4), pages 2970-2986, April.
- Valentina Corradi & Antonella Ianni, "undated".
""Consensus and Co-Existence in an Interactive Process of Opinion Formation'',"
CARESS Working Papres
98-09, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
- Dennis Dittrich & Werner Guth & Boris Maciejovsky, 2005.
"Overconfidence in investment decisions: An experimental approach,"
The European Journal of Finance, Taylor & Francis Journals, vol. 11(6), pages 471-491.
- John P. Conley & Myrna Wooders, 2005.
"Memetics & Voting: How Nature May Make us Public Spirited,"
Vanderbilt University Department of Economics Working Papers
0514, Vanderbilt University Department of Economics.
- Valentina Corradi & Antonella Ianni, "undated".
"Ergodicity and Clustering in Opinion Formation,"
Penn CARESS Working Papers
4e07391e101139fde2f8e70d4, Penn Economics Department.
- Sergio Da Silva & Bruno Moreira & Newton Da Costa Jr, 2015.
"Handedness and digit ratio predict overconfidence in cognitive and motor skill tasks in a sample of preschoolers,"
Economics Bulletin, AccessEcon, vol. 35(2), pages 1087-1097.
- Chuang, Wen-I & Susmel, Rauli, 2011.
"Who is the more overconfident trader? Individual vs. institutional investors,"
Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1626-1644, July.
- Hirshleifer, David & Teoh, Siew Hong, 2008.
"Thought and Behavior Contagion in Capital Markets,"
MPRA Paper
9164, University Library of Munich, Germany.
- Chuang, Wen-I & Lee, Bong-Soo, 2006.
"An empirical evaluation of the overconfidence hypothesis,"
Journal of Banking & Finance, Elsevier, vol. 30(9), pages 2489-2515, September.
- Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998.
"Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades,"
Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
Corrections
All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ysm:somwrk:ysm211. See general information about how to correct material in RePEc.
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/smyalus.html .
Please note that corrections may take a couple of weeks to filter through
the various RePEc services.