Overconfidence and diversification

Research output: Contribution to journalArticlepeer-review

11 Scopus citations


Experimental evidence suggests that people tend to be overconfident in the sense that they overestimate the accuracy of their private information. In this paper, we show that risk-averse principals might prefer overconfident agents in various strategic interactions because these agents help diversify the aggregate risk. This may help understanding why successful analysts and entrepreneurs tend to be overconfident. In addition, a different interpretation of the model presents a novel evolutionary foundation for overconfidence, and explains various stylized facts about this bias.

Original languageEnglish
Pages (from-to)134-153
Number of pages20
JournalAmerican Economic Journal: Microeconomics
Issue number1 D
StatePublished - 2014
Externally publishedYes


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