Overconfidence and endogenous information acquisition

The purpose of this paper is to examine the implications of overconfidence for information acquisition and market efficiency.

The paper studies a model of a competitive market with both overconfident and rational traders endogenously acquiring costly differential information.

The paper shows that overconfident traders acquire more information than do rational traders, and improve market informational efficiency by making price more informative than in a fully rational market.

This result is in contrast with Odean where information acquisition is exogenous, and overconfidence worsens price quality. Therefore, it may be crucial to incorporate endogenous information acquisition into models of overconfidence.