This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

Persistent Overconfidence and Biased Memory: Evidence from Managers

  • David Huffman
  • Collin Raymond
  • Julia Shvets
American Economic Review
vol. 112, no. 10, October 2022
(pp. 3141-75)
Download Full Text PDF

Abstract

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 are motivated to distort memories of feedback and preserve unrealistic expectations.

Citation

Huffman, David, Collin Raymond, and Julia Shvets. 2022. "Persistent Overconfidence and Biased Memory: Evidence from Managers." American Economic Review, 112 (10): 3141-75. DOI: 10.1257/aer.20190668

Additional Materials

JEL Classification

  • D82 Asymmetric and Private Information; Mechanism Design
  • D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • J33 Compensation Packages; Payment Methods
  • L25 Firm Performance: Size, Diversification, and Scope
  • L81 Retail and Wholesale Trade; e-Commerce
  • M52 Personnel Economics: Compensation and Compensation Methods and Their Effects
  • M54 Personnel Economics: Labor Management