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Overconfidence and Timing of Entry
Article

Human Capital Accumulation and the Evolution of Overconfidence

Faculty of Business and Economics (HEC Lausanne), University of Lausanne, Internef 535, CH-1015 Lausanne, Switzerland
Games 2020, 11(4), 46; https://doi.org/10.3390/g11040046
Received: 1 September 2020 / Revised: 5 October 2020 / Accepted: 14 October 2020 / Published: 22 October 2020
(This article belongs to the Special Issue Impact of Overconfidence and Optimism on Individual Decisions)
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. View Full-Text
Keywords: overconfidence; human capital; subjective assessments overconfidence; human capital; subjective assessments
MDPI and ACS Style

Santos-Pinto, L. Human Capital Accumulation and the Evolution of Overconfidence. Games 2020, 11, 46. https://doi.org/10.3390/g11040046

AMA Style

Santos-Pinto L. Human Capital Accumulation and the Evolution of Overconfidence. Games. 2020; 11(4):46. https://doi.org/10.3390/g11040046

Chicago/Turabian Style

Santos-Pinto, Luis. 2020. "Human Capital Accumulation and the Evolution of Overconfidence" Games 11, no. 4: 46. https://doi.org/10.3390/g11040046

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