Working Paper: CEPR ID: DP8722
Authors: Roberta Dess; Xiaojian Zhao
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 differences 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. Our model also sheds light on differences in overconfidence across individuals. We conduct a large-scale survey in China and find evidence consistent with the model's cross-sectional implications.
Keywords: self-confidence; investment; cultural differences; cultural transmission
JEL Codes: D03; D83; Z1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| degree of expected stability in the environment (C62) | overconfidence levels (D80) |
| overconfidence levels (D80) | investment decisions (G11) |
| degree of expected stability in the environment (C62) | investment decisions (G11) |
| overconfidence levels (D80) | multiple equilibria (D50) |
| degree of expected stability in the environment (C62) | multiple equilibria (D50) |
| overconfidence levels (D80) | economic outcomes (F61) |
| degree of expected stability in the environment (C62) | economic outcomes (F61) |