Persistence Overconfidence and Biased Memory: Evidence from Managers presented by David B. Huffman ’96, professor of economics, University of Pittsburgh.
A long-standing puzzle is how overconfidence can persist in settings characterized by repeated feedback. This paper studies managers who participate repeatedly in a high-powered tournament incentive system, learning relative performance each time. Using reduced form and structural methods we find that: (i) managers make overconfident predictions about future performance; (ii) managers have overly-positive memories of past performance; (iii) the two phenomena are linked at an individual level.
Our results are consistent with models of motivated beliefs in which individuals preserve unrealistic expectations by distorting memories.
David B. Huffman, Oberlin Class of ’96, holds a PhD in economics at the University of California, Berkeley.
Sponsored by the Department of Economics Honors Program.