Fund Families as Delegated Monitors of Money Managers

Because a money manager learns more about her skill from hermanagement experience than outsiders can learn from her realizedreturns, she expects inefficiency in future contracts that conditionexclusively on realized returns. A fund family that learns whatthe manager learns can reduce this inefficiency cost if thefamily is large enough. The family’s incentive is to retainany given manager regardless of her skill but, when the familyhas enough managers, it adds value by boosting the credibilityof its retentions through the firing of others. As the numberof managers grows, the efficiency loss goes to zero.     

The Positive Effects of Biased Self-Perceptions in Firms

We study a firm in which the marginal productivity of agents'effort increases with the effort of others. We show that thepresence of an agent who overestimates his marginal productivitymay make all agents better off, including the biased agent himself.This Pareto improvement is obtained even when compensation contractsare set endogenously to maximize firm value. We show that thepresence of a leader improves coordination, but self-perceptionbiases can never be Pareto-improving when they affect the leader.Self-perception biases are also shown to affect job assignmentswithin firms and the likelihood and value of mergers.     

Learning to be overconfident

We develop a multiperiod market model describing both the processby which traders learn about their ability and how a bias inthis learning can create overconfident traders. A trader inour model initially does not know his own ability. He infersthis ability from his successes and failures. In assessing hisability the trader takes too much credit for his successes.This leads him to become overconfident. A trader's expectedlevel of overconfidence increases in the early stages of hiscareer. Then, with more experience, he comes to better recognizehis own ability. The patterns in trading volume, expected profits,price volatility, and expected prices resulting from this endogenousoverconfidence are analyzed.