On the Evolution of Overconfidence and Entrepreneurs

Abstract

This paper explains why seemingly irrational overcon dent behavior can persist. Information aggregation is poor in groups in which most individuals herd. By ignoring the herd, the actions of overcon dent individuals ("entrepreneurs") convey their private information. However, entrepreneurs make mistakes and thus die more frequently. The socially optimal proportion of entrepreneurs trades off the positive information externality against high attrition rates of entrepreneurs, and depends on the size of the group, on the degree of overcon dence, and on the accuracy of individuals' private information. The stationary distribution trades off the tness of the group against the tness of overcon dent individuals.Starting any company is really hard to do, so you can't be so smart that it occurs to you that it can't be done.

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