Abstract

We characterize how wishful thinking affects the interpretation of information in economies with strategic and external effects. While players always choose to exhibit overconfidence in private information, their interpretation of public information depends on how non-fundamental volatility affects payoffs. When volatility increases payoffs, players may endogenously disagree: some under-react to public news, while others overreact. In contrast to rational expectations, public information can increase dispersion in actions while private information can increase aggregate volatility. Our analysis has novel implications for the social value of information and demonstrates how endogenous beliefs can reconcile recent evidence on forecast revisions and information rigidities.

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• Keyword(s):
• strategy and entrepreneurship 180

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