Description
We explore the learning process and behavior of an individual with
unrealistically high expectations
(\overcon_dence") when outcomes also depend on an external fundamental
that a_ects
the optimal action. Moving beyond existing results in the literature,
we show that the agent's
beliefs regarding the fundamental converge under weak conditions.
Furthermore, we identify a
broad class of situations in which \learning" about the fundamental is
self-defeating: it leads the
individual systematically away from the correct belief and toward
lower performance. Due to
his overcon_dence, the agent|even if initially correct|becomes too
pessimistic about the fundamental.
As he adjusts his behavior in response, he lowers outcomes and hence
becomes even
more pessimistic about the fundamental, perpetuating the misdirected
learning. The greater is
the loss from choosing a suboptimal action, the further the agent's
action ends up from optimal.
We partially characterize environments in which self-defeating
learning occurs, and show that
the decisionmaker learns to take the optimal action if and only if a
speci_c non-identi_ability
condition is satis_ed. In contrast to an overcon_dent agent, an
undercon_dent agent's misdirected
learning is self-limiting and therefore not very harmful. We argue
that the decision
situations in question are common in economic settings, including
delegation, organizational,
e_ort, and public-policy choices.