Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/257464 
Year of Publication: 
2020
Citation: 
[Journal:] Games [ISSN:] 2073-4336 [Volume:] 11 [Issue:] 4 [Article No.:] 46 [Publisher:] MDPI [Place:] Basel [Year:] 2020 [Pages:] 1-19
Publisher: 
MDPI, Basel
Abstract: 
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.
Subjects: 
human capital
overconfidence
subjective assessments
JEL: 
D31
D91
J24
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
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