Overconfidence and Coordinating Distributed Investment Decisions : When Being Systematically Wrong is Right

This paper analyzes the impact of both non-systematically inaccurate and systematically inaccurate predictions on the coordination of distributed investment decisions. The predictions of concern pertain to the expected cash outlay necessary to launch and operate an investment project, to the expected cash inflows generated by the project's operation, and to the self-assessment of whether or not the abilities expected to be needed for operation coincide with one's own. Systematic errors manifested by systematically over- or underestimating these predicted project indicators are interpreted as being produced by overconfidence. We show that within a hierarchical business organization with distributed authorities for decision-making, in some cases being overconfident can mitigate the negative effect of erroneous forecasting compared to being non-systematically wrong. Moreover, we offer policy advice on efficiently sequencing error correction in order to increase the performance of the multi-stage coordination system