Monday, July 8, 2013

The Bright Side of Managerial Over-optimism

HILARY Gilles, HSU Charles, SEGAL Benjamin
read working paper
INSEAD Working Paper 2013/82/AC

Human inference and estimation is subject to systematic biases. In particular, there is a long literature showing that overconfidence due to cognitive biases can lead to sub-optimal decisions. We depart from this research by showing empirically that a) over-optimism is a related but different bias, b) it can emerge dynamically in a rational framework rather than because of cognitive biases, and importantly, c) it can improve firm’s welfare, more specifically, firms’ profitability and market value.