Biased Beliefs: Overconfidence and Magical Thinking – Mini Course

Economists often model a person’s behavior as guided by her taste for different physical outcomes, and her probabilistic beliefs that those outcomes will arise. Many of the most prominent models in behavioral economics consider tastes that are more complicated than traditional models would suggest. This short course focuses, instead, on behavioral models with non-standard beliefs.

In the first session, we will discuss evidence and models of overconfidence in one’s own ability. This can lead to behavior such as excess entry in markets. We will ask why and when overconfidence might be advantageous, and what strategies individuals can use to maintain it. We will pay particular attention to evidence that identifies gender as a determinant of overconfidence.

The second session is on magical thinking, which is well documented by psychologists and refers to the mistaken belief that the own behavior may directly influence that of others. We will discuss how to account for magical thinking in an equilibrium model, and show that it can explain commonly observed and hard to explain cooperative behavior, such as contributions to public goods and voter turnout.

Sessions will be on April 2 and April 4, from 12:00 to 13:30

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