Project summary
Project B07 (Haufler and Heinemann) combines neoclassical and behavioral methods to analyze the behavioral characteristics of financial market participants and bank managers. In particular, the team asks how overconfidence interacts with moral hazard incentives driven, for example, by bail-out guarantees. In the new funding period, the project aims to analyze the stability of overprecision across domains and over time, its relation to inattention and attitudes toward strategic uncertainty. Theproject also studies the effects of narratives on motivated beliefs, and methods for de-biasing subjects with motivated beliefs. Furthermore, it will test, in a laboratory experiment, the predictions of a previously developed model regarding the sorting of bank managers with different degrees of overconfidence into different incentive contracts. Finally, the project will extendtheoretical models from the previous funding phases by analyzing optimally differentiated regulatory and bailout policies for banks, accounting for the heterogeneity of both banks and their managers.