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Overconfidence, Stability and Investments

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  • Dessi, Roberta
  • Zhao, Xiaojian

Abstract

The available evidence from numerous studies suggests that overconfidence varies significantly across countries. We develop a model that endogenizes these differences and examines their economic consequences. A crucial determinant of difierences in overconfidence is the degree of expected stability of the environment, with greater changefulness giving rise to more overconfident beliefs. When stability is endogenized, multiple equilibria can emerge, \dynamism" and overconfidence reinforcing each other in one case, stability and realistic self-assessment in another. Evidence from 38 countries is consistent with this relationship. Finally, our model also sheds some light on differences in overconfidence within countries, as well as exploring the interaction between overconfidence and sensitivity to shame.

Suggested Citation

  • Dessi, Roberta & Zhao, Xiaojian, 2015. "Overconfidence, Stability and Investments," TSE Working Papers 15-580, Toulouse School of Economics (TSE), revised Sep 2017.
    • Handle: RePEc:tse:wpaper:29327
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    Cited by:

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    7. Tjernström, Emilia & Lybbert, Travis J. & Hernández, Rachel Frattarola & Correa, Juan Sebastian, 2021. "Learning by (virtually) doing: Experimentation and belief updating in smallholder agriculture," Journal of Economic Behavior & Organization, Elsevier, vol. 189(C), pages 28-50.

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    More about this item

    Keywords

    Self-confidence; investment; cultural differences; cultural transmission; shame;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • Z1 - Other Special Topics - - Cultural Economics

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