Human capital accumulation and the evolution of overconfidence

DOI10.3390/G11040046MaRDI QIDQ2223650zbMATH OpenOpenAlexFDO

Authors Luís Santos-Pinto

Publication date 1 February 2021

Published in Games (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://doi.org/10.3390/g11040046

zbMATH Keywords

human capitaloverconfidencesubjective assessments

Mathematics Subject Classification ID

Labor markets (91B39)

Review text

Summary: This paper studies the evolution of overconfidence over a cohort's working life. To do this, the paper incorporates subjective assessments into a continuous time human capital accumulation model with a finite horizon. The main finding is that the processes of human capital accumulation, skill depreciation, and subjective assessments imply that overconfidence first increases and then decreases over the cohort's working life. In the absence of skill depreciation, overconfidence monotonically increases over the cohort's working life. The model generates four additional testable predictions. First, everything else equal, overconfidence peaks earlier in activities where skill depreciation is higher. Second, overconfidence is lower in activities where the distribution of income is more dispersed. Third, for a minority of individuals, overconfidence decreases over their working life. Fourth, overconfidence is lower with a higher market discount rate. The paper provides two applications of the model. It shows the model can help make sense of field data on overconfidence, experience, and trading activity in financial markets. The model can also explain experimental data on the evolution of overconfidence among poker and chess players.

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Cites work

• A model of rational bias in self-assessments
• Apparent overconfidence
• Boys will be boys: Gender, overconfidence, and common stock investment
• First Impressions Matter: A Model of Confirmatory Bias
• Overconfidence in tournaments: evidence from the field
• The dynamic evolution of preferences
• What to maximize if you must

Cited in

(4)

• Learning your own ability
• Overconfidence and social signalling
• Worker overconfidence: Field evidence and implications for employee turnover and firm profits
• Overconfidence in tournaments: evidence from the field

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