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Overconfidence, Underconfidence, and Welfare

Author

Listed:
  • Takao Asano

    (Okayama University)

  • Takuma Kunieda

    (City University of Hong Kong)

  • Akihisa Shibata

    (Institute of Economic Research, Kyoto University)

Abstract

Using a simple framework of Cooper and John (1988) and Cooper (1999), this paper derives the conditions under which overconfidence and underconfidence of agents lead to Pareto improvement. We show that an agent’s overconfidence in a game exhibiting strategic complementarity and positive spillovers and an agent’s underconfidence in a game exhibiting strategic complementarity and negative spillovers can lead to Pareto improvement.

Suggested Citation

  • Takao Asano & Takuma Kunieda & Akihisa Shibata, 2014. "Overconfidence, Underconfidence, and Welfare," KIER Working Papers 903, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:903
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    overconfidence; underconfidence; strategic complementarity; strategic substitutability; positive spillover; negative spillover;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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