Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?

Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test? (1997)

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by Albert S. Kyle , F. Albert Wang , Jim Peck , S. Viswanathan

Venue:	Journal of Finance
Citations:	66 - 0 self

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Datum	Value	Source
TITLE	Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?	user correction - Legacy Corrections
AUTHOR NAME	Albert S. Kyle	user correction - Legacy Corrections
AUTHOR AFFIL	* Kyle is from the Fuqua School of Business, Duke University. Wang is from the Graduate School of; Business, Columbia University. We benefited from helpful discussions with Jim Friedman, Larry Glosten,	user correction - Legacy Corrections
AUTHOR NAME	F. Albert Wang	user correction - Legacy Corrections
AUTHOR AFFIL	* Kyle is from the Fuqua School of Business, Duke University. Wang is from the Graduate School of; Business, Columbia University. We benefited from helpful discussions with Jim Friedman, Larry Glosten,	user correction - Legacy Corrections
AUTHOR NAME	Jim Peck	user correction - Legacy Corrections
AUTHOR AFFIL	Corresponding author: F. Albert Wang, 420 Uris Hall, Graduate School of Business, Columbia	user correction - Legacy Corrections
AUTHOR NAME	S. Viswanathan	user correction - Legacy Corrections
AUTHOR AFFIL	Corresponding author: F. Albert Wang, 420 Uris Hall, Graduate School of Business, Columbia	user correction - Legacy Corrections
ABSTRACT	In a duopoly model of informed speculation, we show that overconfidence may strictly dominate rationality since an overconfident trader may not only generate higher expected profit and utility than his rational opponent, but also higher than if he were also rational. This occurs because overconfidence acts like a commitment device in a standard Cournot duopoly. As a result, for some parameter values the Nash equilibrium of a two-fund game is a Prisoner's Dilemma in which both funds hire overconfident managers. Thus, overconfidence can persist and survive in the long run. 2 The rational expectations hypothesis implies that economic agents make decisions as though they know a correct probability distribution of the underlying uncertainty. According to the traditional view (Alchian (1950) and Friedman (1953)), the rational expectations hypothesis is empirically plausible because rational beliefs are better able to survive the market test than irrational beliefs. Yet, the empirical liter...	user correction - Legacy Corrections
YEAR	1997	INFERENCE
VENUE	Journal of Finance	INFERENCE
VENUE TYPE	JOURNAL	INFERENCE
PAGES	2073--2090	INFERENCE
VOLUME	52	INFERENCE
CITATIONS	39 found	ParsCit 1.0