Human Capital Accumulation and the Evolution of Overconfidence

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Version: Final published version
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Serval ID
serval:BIB_ECDA51565A01
Type
Article: article from journal or magazin.
Collection
Publications
Institution
Title
Human Capital Accumulation and the Evolution of Overconfidence
Journal
Games
Author(s)
Santos Pinto Luis
Publication state
Published
Issued date
14/10/2020
Volume
11
Language
english
Abstract
This paper studies the evolution of overconfidence over a cohort's working life. To do that the paper incorporates subjective assessments into a continuous time human capital accumulation model with a finite horizon. The main finding is that the process of human capital accumulation, skill depreciation, and subjective assessments imply that overconfidence of a cohort is first increasing and then decreasing over the cohort's working life. In the absence of skill depreciation, overconfidence of a cohort is monotonically increasing over the
cohortís 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 explain experimental data on the evolution of overconfidence of poker and chess players.
Keywords
Overconfidence, Human capital, Subjective assessments
Create date
25/02/2022 11:34
Last modification date
14/05/2022 6:34
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