Publication Date: June 2001
This paper explains why seemingly irrational overconﬁdent behavior can persist. Information aggregation is poor in groups in which most individuals herd. By ignoring the herd, the actions of overconﬁdent individuals (“entrepreneurs”) convey their private information. However, entrepreneurs make mistakes and thus die more frequently. The socially optimal proportion of entrepreneurs trades oﬀ the positive information externality against high attrition rates of entrepreneurs, and depends on the size of the group, on the degree of overconﬁdence, and on the accuracy of individuals’ private information. The stationary distribution trades oﬀ the ﬁtness of the group against the ﬁtness of overconﬁdent individuals.
Evolution, overconﬁdence, behavioral economics
JEL Classification Codes: D7, L2