On the evolution of overconfidence and entrepreneurs

This paper explains why seemingly irrational overconfident behavior can per sist. Information aggregation is poor in groups in which most individuals h erd. By ignoring the herd, the actions of overconfident individuals ("entre preneurs") convey their private information. However, entrepreneurs make mi stakes and thus die more frequently. The socially optimal proportion of ent repreneurs trades off the positive information externality against high att rition rates of entrepreneurs, and depends on the size of the group, on the degree of overconfidence, and on the accuracy of individuals' private info rmation. The stationary distribution trades off the fitness of the group ag ainst the fitness of overconfident individuals.