Overconfidence and Occupational Choice / Edward P. Lazear.

By:

Lazear, Edward P

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w21921.Publication details: Cambridge, Mass. National Bureau of Economic Research 2016.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: A statistical theory of overconfidence is proposed and applied to the issue of occupational choice. Individuals who can choose whether to engage in an activity or not must estimate their performance. The estimates have error and that error has positive expectation among those who engage in the activity. As a result, an unbiased ex ante estimate of performance in an occupatoin results in an ex post biased estimate of ability among those enter. The statistical theory of overconfidence provides a number of testable implications, most significant of which is that overconfidence should be more prevalent in occupations where estimates of ability are noisier. This and other implications are tested and found to hold using the Current Population Survey and Panel Study of Income Dynamics data.

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Working Paper	Biblioteca Digital	Colección NBER	nber w21921 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w21919 Dynamic Debt Maturity /	nber w2192 The Effects of Taxation on the Merger Decision /	nber w21920 Intermediary Asset Pricing: New Evidence from Many Asset Classes /	nber w21921 Overconfidence and Occupational Choice /	nber w21922 Teacher Turnover, Teacher Quality, and Student Achievement in DCPS /	nber w21923 Not Working at Work: Loafing, Unemployment and Labor Productivity /	nber w21924 Skewed Wealth Distributions: Theory and Empirics /	Next

January 2016.

A statistical theory of overconfidence is proposed and applied to the issue of occupational choice. Individuals who can choose whether to engage in an activity or not must estimate their performance. The estimates have error and that error has positive expectation among those who engage in the activity. As a result, an unbiased ex ante estimate of performance in an occupatoin results in an ex post biased estimate of ability among those enter. The statistical theory of overconfidence provides a number of testable implications, most significant of which is that overconfidence should be more prevalent in occupations where estimates of ability are noisier. This and other implications are tested and found to hold using the Current Population Survey and Panel Study of Income Dynamics data.