Huffman, D., Raymond, C. and Shvets, J.

Persistent Overconfidence and Biased Memory: Evidence from Managers

American Economic Review

Vol. 112 pp. 3141-3175 (2022)

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.

Keywords: Overconfidence, memory, tournament, motivated beliefs

JEL Codes: D82, D83, J33, L25, L81, M52, M54

Author links: Julia Shvets

Publisher's Link: https://doi.org/10.1257/aer.20190668