Overconfidence, Imperfect Competition, and Evolution

This study explores whether market competition between firms owned and run by managers favors overconfident managers. We study this question in a linear duopoly setting with differentiated products. The main result is that when there is complete information about the competitor’s type, evolutionary market selection forces will always favor a positive degree of managerial overconfidence. This result is robust to both the form of the strategic interaction and the nature of product differentiation. We also study the case of incomplete information about the competitor’s type under quantity competition and show that evolutionary forces may still favor overconfident managers if market selection is driven by relative rather than absolute profit performance.