Discussion Paper Details

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Title: Overconfidence and Delegated Portfolio Management

Author(s): Frédéric Palomino and Abdolkarim Sadrieh

Publication Date: February 2004

Keyword(s): optimal contract, overconfidence and risk-taking incentives

Programme Area(s): Financial Economics

Abstract: Following extensive empirical evidence about ?market anomalies? and overconfidence, the analysis of financial markets with agents overconfident about the precision of their private information has received a lot of attention. All these models consider agents trading for their own account. In this article, we analyse a standard delegated portfolio management problem between a financial institution and a money manager who may be of two types: rational or overconfident. We consider several situations. In each case, we derive the optimal contract and results on the performance of financial institution hiring overconfident managers relative to institutions hiring rational agents, and results on the price impact of overconfidence.

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Bibliographic Reference

Palomino, F and Sadrieh, A. 2004. 'Overconfidence and Delegated Portfolio Management'. London, Centre for Economic Policy Research.