DP12740 The culture of overconfidence

Author(s): Venkataraman Bhaskar, Caroline Thomas
Publication Date: February 2018
Keyword(s): Higher-order beliefs, Mis-specified models, Non-common priors, overconfidence, Policy persistence
JEL(s): C73, D72, D82
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12740

Why do political leaders or managers persist with their pet projects and policies despite bad news? When project continuation is a more informative experiment than project termination, a reputationally concerned leader is biased towards continuation, as it enables her to disclose her private information. Perceived overconfidence on the part of the leader aggravates this tendency, even when the leader is not, in fact, overconfident. Higher-order beliefs regarding overconfidence can induce inefficient equilibrium selection even when it is ``almost common knowledge" that the leader is not overconfident. Thus, a culture where leaders are expected to be overconfident can have undesirable effects even upon leaders who have correct beliefs.