Investment Strategy and Selection Bias: An Equilibrium Perspective on Overoptimism

Philippe Jehiel (1, 2)

1 PSE - Paris School of Economics
2 PJSE - Paris Jourdan Sciences Economiques

Investors implement projects based on idiosyncratic signal observations, without knowing how signals and returns are jointly distributed. The following heuristic is studied: investors collect information on previously implemented projects with the same signal realization and invest if the associated mean return exceeds the cost. The corresponding steady states result in suboptimal investments, due to selection bias and the heterogeneity of signals across investors. When higher signals are associated with higher returns, investors are overoptimistic, resulting in overinvestment. Rational investors increase the overoptimism of sampling investors, thereby illustrating a negative externality imposed by rational investors.

Domaines: Economies et finances

Philippe Jehiel. Investment Strategy and Selection Bias: An Equilibrium Perspective on Overoptimism. American Economic Review, 2018, 108 (6), pp.1582-1597. ⟨10.1257/aer.20161696⟩. ⟨halshs-01884380⟩