Confidence Cycles

Schmalz, Martin C. and Eisenbach, Thomas M. Confidence Cycles. Federal Reserve Bank of New York.

PDF (Working Paper)
Download (766kB) | Preview


We provide a model that rationalizes variations in confidence of rational agents, both in the time-series and the cross-section. Combining horizon-dependent risk aversion (“anxiety”) and selective memory, we show that over- and underconfidence can arise in the Bayesian equilibrium of an intra-personal game. In
the time-series, overconfidence is more prevalent when actual risk levels are high, while underconfidence occurs when risks are low. In the cross-section, more anxious agents are more prone to biased confidence and their beliefs fluctuate more, leading them to buy in booms and sell in crashes. Lastly, fluctuations in confidence can amplify boom-bust cycles.

Item Type: Other Working Paper
Keywords: overconfidence, dynamic consistency, biases, deception, risk taking, finance
Subject(s): Finance
Date Deposited: 10 Jan 2019 15:58
Last Modified: 10 Jan 2019 15:58
Funders: n/a

View statistics

Actions (login required)

Edit View Edit View