Abstract
Individuals are overconfident, especially those in positions to influence outcomes. The impact of hiring an overconfident portfolio manager is studied here within the standard principal-agent framework. When compensation is endogenously determined, we find that investors can benefit from managerial overconfidence. Overconfidence induces a higher level of effort until the effects of restrictions on portfolio formation take over. Further, by increasing the incentive fee and sharing more risk the investor can curb excessive risk taking. However, excessive overconfidence is detrimental to the investor. We empirically test and confirm the effects of portfolio constraints and incentive fee on manager’s self-attribution bias.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
