My main area of research is Behavioral Economics. I investigate the links between information, cognition, judgment, and economic behavior. I study the implications of behavioral biases like overconfidence and optimism in terms of individual decision making, the design of incentives in organizations, market outcomes, and welfare. I use laboratory and field experiments to study the existence and consequences of these biases for economic decisions.
My most significant contributions to this literature are as follows. Santos-Pinto and Sobel (2005) describe a mechanism which explains how individuals become overconfident. Santos-Pinto (2008) shows how a principal can write a contract to take advantage of an agent’s overconfident beliefs and that agents’ overconfident beliefs can make interdependent incentive schemes more attractive to the principal than individualistic ones. Santos-Pinto (2010) analyzes the impact of overconfidence on tournaments (e.g., bonuses and promotion incentive schemes). Santos-Pinto (2012) shows how wage compression can be the result of overconfidence and that the gender pay gap can be partly due to gender differences in confidence. Santos-Pinto and Dell’Era (2017)  show that optimism generates a new reason for entrepreneurs to own equity in their firms and for mispricing of new equity issues. Santos-Pinto, Dell’Era and Opromolla (2023) show that optimism can account for more than half of the size of the entrepreneurial earnings puzzle in the UK.

My work can be grouped into two main axes of research. The first axis focuses on the impact of overconfidence and optimism on individual decisions, incentives in organizations, market outcomes, and welfare. I generalize theoretical models by assuming that some agents are rational, some are overconfident or optimist. I derive equilibrium predictions of these models and generate testable implications.
The second axis of my research uses experimental methods to study risk attitudes, their interaction with self-confidence and strategic decisions. I am particularly interested in understanding how individuals react to skewed payoff distributions, that is, situations where there is a small probability of a large gain (e.g. gambling in public lotteries, entry into entrepreneurship, market entry) or a small probability of a large loss (e.g., insurance). I am also interested in understanding how beliefs about skill affect risky decisions like career choices, market entry, and financial investments.


Overconfidence in Tullock Contests, with Petros Sekeris.
This version: January 2024. Download

This paper investigates the role of overconfidence in contests. An overconfident player overestimates his probability of wining the contest. In two player contests where players have the same technology and preferences, the more overconfident player is the one who exerts lower effort. In addition, an increase in overconfidence of either player unambiguously lowers the efforts of both players. In contrast, in contests with n > 2 players, overconfidence can raise the equilibrium efforts above the Nash prediction with rational players (overspending), and even lead to aggregate efforts larger than the prize (over-dissipation). Finally, we show that overconfidence leads to more entry in contests.

Confidence and Performance in Tournaments and Contests, with Petros Sekeris.
This version: February 2024. Download

This paper studies the effect of confidence biases on players’ relative efforts in tournaments and contests. We uncover a non-monotonic effect of confidence on equilibrium relative efforts and winning probabilities. A player with either a low or a high confidence exerts less effort than his rival at equilibrium. However, for intermediate confidence levels, the player exerts more effort than his rival. These results show that a less able or a cost disadvantaged player may nevertheless outcompete his rival because of confidence biases.

Subjective Evaluation Contracts for Overconfident Workers, with Matteo Foschi. R&R The RAND Journal of Economics
This version: March 2021. Download  Main Appendix  Online Appendix

This paper analyzes the impact of worker overconfidence on the design of optimal subjective evaluation contracts. An overconfident worker either overestimates the probability of success of the project (overestimation) or believes his private performance evaluation is more informative than it actually is (overprecision). The paper derives four main results. First, overestimation changes the firm’s optimal subjective evaluation contract. Second, can lead to exploitation. Third, overprecision can lead the firm to offer a subjective evaluation contract that uses the worker’s performance as an input  to set compensation. Fourth, overprecision can lead either to a Pareto improvement or exploitation. 

Overconfidence in Elimination Contests, with Yuxi Chen. This version: May 2024. Download Online Appendix

This paper analyzes how overconfidence affects behavior in elimination contests. We focus on two-stage elimination contests with four players. In the first-stage, the players are matched pairwise, and each pair competes in one semifinal. In the second-stage, the first-stage winners compete in the final. An overconfident player overestimates his winning probability in each pairwise interaction. Our findings reveal a nuanced interplay between overconfidence and effort exertion. An overconfident player expends less effort in the final stage than a rational rival. However, this pattern can be inverted in the semifinal, where an overconfident player can exert more effort than a rational rival. We also uncover that an overconfident player can have the highest equilibrium probability of winning an elimination contest. Our results offer a novel perspective on the promotion of overconfident individuals to CEO positions. They also highlight that large increases in executive compensation can render the pursuit of CEO positions exceptionally appealing to overconfident individuals.


The Role of Self-Confidence in Teamwork: Experimental Evidence, with Adrian Bruhin and Fidel Petros. Forthcoming Experimental Economics.
This version: May 2024. Download Appendix

Teamwork has become increasingly important in modern organizations and the labor market. Yet, little is known about the role of self-confidence in teamwork. In this paper, we present evidence from a laboratory experiment using a team real effort task. Effort and ability are complements and there are synergies between teammates’ efforts.
We exogenously manipulate subjects’ self-confidence about their ability using easy and hard general knowledge quizzes. We find that overconfidence leads to more effort, less free riding, and higher team revenue. This finding is primarily due to a direct effect of overconfidence on own effort provision, while there is no evidence that subjects strategically respond to the teammate’s overconfidence.

Experimental Evidence on the Transmission of Honesty and Dishonesty: A Stairway to Heaven and a Highway to Hell, with Georgia Michailidou and Paola Colzani.
Economics Letters, 2023, 231, 111257. Download Appendix

Various theories of social behavior propose that individuals condition actions that involve a moral value by following each other’s behavior. The theoretical and experimental instruments employed to evaluate this conditioning often focus only on the diffusion of actions with negative moral value (e.g. dishonesty, norm violation, tax evasion). In this paper, we develop and execute a laboratory experiment to study the diffusion of actions with both, positive and negative moral values. We use a lying paradigm and introduce a novel methodology operationalizing beliefs as intention proxies to study the switch between honesty and dishonesty in simultaneous and sequential move sequences. The results indicate asymmetries; while lying is strongly contagious, truth-telling is weakly so.

Can Optimism Solve the Entrepreneurial Earnings Puzzle?, with Michele Dell’Era and Luca David Opromolla.
The Scandinavian Journal of Economics, 2023, Vol. 125, No. 1, 139-169. Download Appendix

This paper applies a general equilibrium occupational choice model to study the impact of optimism on the earnings of entrepreneurs and workers. We extend Lucas’ (1978) by assuming that a fraction of individuals is optimistic about their ability as entrepreneurs. The model shows that optimism leads to a misallocation of talent and inputs which raises input prices and lowers output. The model is calibrated to match salient features of the U.K. economy and the British Household Panel Survey. The calibration shows that optimism can account for more than half of the size of the entrepreneurial earnings puzzle in the U.K.

Risk and Rationality: The Relative Importance of Probability Weighting and Choice Set Dependence, with Adrian Bruhin and Maha Manai.
Journal of Risk and Uncertainty, 2022, Vol. 65, No. 2, 139-184. Download  Appendix

The literature suggests that probability weighting and choice set dependence influence risky choices. However, their relative importance remains an open question. We present a joint test that uses binary choices between lotteries provoking Common Consequence and Common Ratio Allais Paradoxes and manipulates their correlation structure. We show non-parametrically that probability weighting and choice set dependence both play a role at describing aggregate choices. To parsimoniously account for heterogeneity, we also estimate a structural model using a finite mixture approach. The model uncovers substantial heterogeneity and classifies subjects into three types: 38% Prospect Theory types whose choices are predominantly driven by probability weighting, 34% Salience Theory types whose choices are predominantly driven by choice set dependence, and 28% Expected Utility Theory types. The model predicts type-specific differences in the frequency of preference reversals out-of-sample. Moreover, the out-of-sample predictions indicate that the choice context shapes the influence of choice set dependence.

Human Capital Accumulation and the Evolution of Overconfidence 
Games, 2020, 11. Download

This paper studies the evolution of overconfidence over a cohort’s working life. To do that the paper incorporates subjective assessments into a continuous time human capital accumulation model with a finite horizon. The main finding is that the process of human capital accumulation, skill depreciation, and subjective assessments imply that overconfidence of a cohort is first increasing and then decreasing over the cohort’s working life. In the absence of skill depreciation, overconfidence of a cohort is monotonically increasing over the cohort’s working life. The model generates four additional testable predictions. First, everything else equal, overconfidence peaks earlier in activities where skill depreciation is higher. Second, overconfidence is lower in activities where the distribution of income is more dispersed. Third, for a minority of individuals overconfidence decreases over their working life. Fourth, overconfidence is lower with a higher market discount rate. The paper provides two applications of the model. It shows the model can help make sense of field data on overconfidence, experience, and trading activity in financial markets. The model can explain experimental data on the evolution of overconfidence of poker and chess players. 

Overconfidence and Timing of Entry, with Tiago Pires.  
Games, 2020, 11. Download

We analyze the impact of overconfidence on the timing of entry in markets, profits, and welfare using an extension of Hamilton and Slutsky’s (1990) quantity commitment game. Players have private information about costs, one player is overconfident, and the other one rational. We find that for slight levels of overconfidence and intermediate cost asymmetries there is a unique cost-dependent equilibrium where the overconfident player has a higher ex-ante probability of being the Stackelberg leader. Overconfidence lowers the profit of the rational player but can increase that of the overconfident player. Consumer rents increase with overconfidence while producer rents decrease which leads to an ambiguous welfare effect.

Overconfidence in Labor Markets, with Leonidas Enrique de la Rosa.
Handbook of Labor, Human Resources and Population and Economics, 2020, ed. K. Zimmermann, Springer. Download

This chapter reviews how worker overconfidence affects labor markets. Evidence from psychology and economics shows that in many situations, most people tend to overestimate their absolute skills, overplace themselves relative to others, and overestimate the precision of their knowledge. The chapter starts by reviewing evidence for overconfidence and for how overconfidence affects economic choices. Next, it reviews economic explanations for overconfidence. After that, it discusses research on the impact of worker overconfidence on labor markets where wages are determined by bargaining between workers and firms. Here, three key questions are addressed. First, how does worker overconfidence affect effort provision for a fixed compensation scheme? Second, how should firms design compensation schemes when workers are overconfident? In particular, will a compensation scheme offered to an overconfident worker have higher- or lower-powered incentives than that offered to a worker with accurate self-perception? Third, can worker overconfidence lead to a Pareto improvement? The chapter continues by reviewing research on the impact of worker overconfidence on labor markets where workers can move between firms and where neither firms nor workers have discretion over wage setting. The chapter concludes with a summary of its main findings and a discussion of avenues for future research.

How Do Beliefs about Skill Affect Risky Decisions?, with Adrian Bruhin and David Staubli.
Journal of Economic Behavior and Organization, 2018, Vol 150, 350-371. Download 

Beliefs about skill matter for risky decisions such as market entry, career choices, and financial investments. Yet in most laboratory experiments risk is exogenously given and beliefs about skill play no role. We use a laboratory experiment without strategy confounds to isolate the impact of beliefs about skill on risky choices. We find that low (high) skill individuals are more (less) willing to take risks on gambles where the probabilities depend on skill than on gambles with exogenously given probabilities.This happens because low (high) skill individuals overestimate (underestimate) their relative skill. Consequently, the wrong people may engage in risky activities while the right people may be crowded out.

Entrepreneurial Optimism and the Market for New Issues, with Michele Dell’Era.
International Economic Review, 2017, Vol. 58, No. 2, 383-419. Download

This paper analyzes the impact of entrepreneurial optimism on the market for new issues. We find that the existence of optimists generates a new reason for entrepreneurs to own equity in their firms. We show that optimism is a natural explanation for why some new issues are underpriced and others overpriced. We also show that the impact of optimism on entrepreneurs’ equity holdings depends on the number of optimists, absolute risk aversion, and cash flow variance. Optimism makes entrepreneurs worse off. In contrast, optimism can make outside investors better off when entrepreneurs signal firm value by retaining shares and underpricing.

Home Bias in Multimarket Cournot Games, with Catherine Roux and Christian Thöni. 
European Economic Review, 2016, Vol. 89, 361-371. Download

We explore the role of trade costs for the home bias in trade. In a series of Cournot duopoly experiments with a home and an export market, we compare output choices when fims face different levels of trade costs. We find that there is two-way trade in identical products and that firms hold the majority market share in their home market. The resulting home bias turns out to be, however, stronger than that predicted by theory, and it even occurs without trade costs. Tacit collusion contributes to the home bias observed in our experiment but does not offer a full explanation for the phenomenon. 

Detecting Heterogeneous Risk Attitudes with Mixed Gambles, with Adrian Bruhin, José Mata, and Thomas Astebro.
Theory and Decision2015, Vol. 79, Issue 4, 573-600. Download

We propose a task for eliciting attitudes towards risk that is close to real world risky decisions which typically involve gains and losses. The task consists of accepting or rejecting gambles that provide a gain with probability p and a loss with probability 1-p. We employ finite mixture models to uncover heterogeneity in risk preferences and find that (i) behavior is heterogeneous, with one half of the individuals behaving as expected utility maximizers, (ii) for the others, reference-dependent models perform better than those where subjects derive utility from final outcomes, (iii) models with sign dependent decision weights perform better than those without, and (iv) there is no evidence for loss aversion. The procedure is sufficiently simple so that it can be easily used in field or lab experiments where risk elicitation is not the main experiment.

Skewness Seeking: Risk Loving, Optimism or Overweighting of Small Probabilities?, with Thomas Astebro and José Mata.  
Theory and Decision, 2015, Vol. 78, Issue 2, 189-208. Download Appendix

In a controlled laboratory experiment we use one sample of college students and one of mature executives to investigate how positive skew influences risky choices. In reduced-form regressions we find that both students and executives make riskier choices when lotteries display positive skew. We estimate decision models to explore three explanations for skew seeking choices: risk-loving (convex utility), optimism (concave probability weighting), and likelihood insensitivity (inverse s-shape probability weighting). We find no role for love for risk as neither students nor executives have convex utility. Both optimism and likelihood insensitivity play a part in skew seeking choices. Likelihood insensitivity is larger for students than for executives. Executives have more concave utility and are more optimistic than students, but this is found to be largely due to them being older.

A Cognitive Hierarchy Model of Behavior in the Action Commitment Game, with Daniel Carvalho. 
International Journal of Game Theory, 2014, Vol. 43, Issue 3, 551-577. Download

We apply the cognitive hierarchy model of Camerer, Ho and Chong (2004)—where players have different levels of reasoning—to Huck, Müller and Normann’s (2002) discrete version of Hamilton and Slutsky’s (1990) action commitment game—a duopoly with endogenous timing of entry. We show that, for empirically reasonable average number of thinking steps, the model rules out Stackelberg equilibria, generates Cournot outcomes including delay, and outcomes where the first mover commits to a quantity higher than Cournot but lower than Stackelberg leader. We show that a cognitive hierarchy model with quantal responses can explain the most important features of the experimental data on the action commitment game in Huck, Müller and Normann (2002). In order to gauge the success of cognitive hierarchy model in fitting the data, we compare it to a noisy Nash model. We find that the cognitive hierarchy model with quantal responses fits the data better than the noisy Nash model.  

Experimental Cournot Oligopoly and Inequity Aversion, with Doruk Iris.
Theory and Decision2014, Vol. 76, Issue 1, 31-45. Download

This paper explores the role of inequity aversion as an explanation for observed behavior in experimental Cournot oligopolies. We show that inequity aversion can change the nature of the strategic interaction: quantities are strategic substitutes for sufficiently asymmetric output levels but strategic complements otherwise. We find that inequity aversion can explain why: (i) some experiments result in higher than Cournot-Nash production levels while others result in lower, (ii) collusion often occurs with only two players whereas with three or more players market outcomes are very close to Cournot-Nash, and (iii) players often achieve equal profits in asymmetric Cournot oligopoly.

Tacit Collusion under Fairness and Reciprocity, with Doruk Iris  
Games, 2013, 4, 50-65. Download

This paper departs from the standard profit-maximizing model of firm behavior by assuming that firms are motivated in part by personal animosity—or respect—towards their competitiors. A reciprocal firm responds to unkind behavior of rivals with unkind actions (negative reciprocity), while at the same time, it responds to kind behavior of rivals with kind actions (positive reciprocity). We find that collusion is easier to sustain when firms have a concern for reciprocity towards competing firms provided that they consider collusive prices to be kind and punishment prices to be unkind. Thus, reciprocity concerns among firms can have adverse welfare consequences for consumers. 

Labor Market Signaling and Self-Confidence: Wage Compression and the Gender Pay Gap
Journal of Labor Economics, 2012, Vol. 30, No. 4, 873-914. Download

I extend Spence’s (1973) signaling model by assuming some workers are overconfident—they underestimate their marginal cost of acquiring education—and some are underconfident. Firms cannot observe workers’ productive abilities and beliefs but know the fractions of high-ability, overconfident, and underconfident workers. I find that biased beliefs lower the wage spread and compress the wages of unbiased workers. I show that gender differences in self-confidence can contribute to the gender pay gap. If education raises productivity, men are overconfident, and women underconfident, then women will, on average, earn less than men. Finally, I show that biased beliefs can improve welfare.

Positive Self-Image in Tournaments
International Economic Review, 2010, Vol. 51, No. 2, 475-496. Download

This paper analyzes the implications of worker overestimation of productivity for firms in which incentives take the form of tournaments. Each worker overestimates his productivity but is aware of the bias in his opponent’s self-assessment. The manager of the firm, on the other hand, correctly assesses workers’ productivities and self-beliefs when setting tournament prizes. The paper shows that, under a variety of circumstances, firms can benefit from worker positive self-image. The paper also shows that worker positive self-image can improve welfare in tournaments.In contrast, workers’ utility declines due to their own misguided choices.

Overconfidence in Tournaments: Evidence from the Field, with Young-Joon Park.
Theory and Decision, 2010, Vol. 69, 143-166. Download

This paper uses a field survey to investigate the quality of individuals’ beliefs of relative performance in tournaments. We consider two field settings, poker and chess, which differ in the degree to which luck is a factor and also in the information that players have about the ability of the competition. We find that poker players’ forecasts of relative performance are random guesses with an overestimation bias. Chess players also overestimate their relative performance but make informed guesses. We find support for the “unskilled and unaware hypothesis” in chess: high skilled chess players make better forecasts than low skilled chess players. Finally, we find that chess players’ forecasts of relative performance are not efficient.

The Impact of Firm Cost and Market Size Asymmetries on National Mergers in a Three-Country Model
International Journal of Industrial Organization, 2010, Vol. 28, 682-694. Download

This paper studies the impact of firm cost and market size asymmetries on merger decisions. I consider a model where a small and a large country compete in a third (world) market. Each of the two countries has two firms (with potentially different costs) that supply the domestic market and export to the third market. Merger decisions in the two countries are modeled as a simultaneously move game. The paper finds that firms in the large country have more incentives to merge than firms in the small country. In contrast, the government of the large country has more incentives to block a merger than the government of the small country. Thus, the model predicts that conflicts of interest between governments and firms concerning national mergers are more likely in large countries than in small ones.

Asymmetries in Information Processing in a Decision Theory Framework
Theory and Decision, 2009, Vol. 66, 317-343. Download

Research in psychology suggests that some individuals are more sensitive to positive than to negative information while others are more sensitive to negative rather than positive information. I take these cognitive positive-negative asymmetries in information processing to a Bayesian decision-theory model and explore its consequences in terms of decisions and payoffs. I show that in monotone decision problems economic agents with more positive-responsive information structures are always better off, ex-ante, when they face problems where payoffs are relatively more sensitive to the action chosen when the state of nature is favorable.

Positive Self-Image and Incentives in Organizations
The Economic Journal, 2008, Vol. 118, 1315-1332. Download

This paper investigates the implications of individuals’ mistaken beliefs of their abilities on incentives in organizations using the principal-agent model of moral hazard. The paper shows that if effort is observable, then an agent’s mistaken beliefs about own ability are always favorable to the principal. However, if effort is unobservable, then an agent’s mistaken beliefs about own ability can be either favorable or unfavorable to the principal. The paper provides conditions under which an agent’s over estimation about own ability is favorable to the principal when effort is unobservable. Finally, the paper shows that workers’ mistaken beliefs about their coworkers’ abilities make interdependent incentive schemes more attractive to firms than individualistic incentive schemes.

Making Sense of the Experimental Evidence on Endogenous Timing in Duopoly Markets
Journal of Economic Behavior and Organization, 2008, Vol. 68, 657-666. Download

The prediction of asymmetric equilibria with Stackelberg outcomes is clearly the most frequent result in the endogenous timing literature. Several experiments have tried to validate this prediction empirically, but failed to find support for it. By contrast, the experiments find that simultaneous-move outcomes are modal and that behavior in endogenous timing games is quite heterogeneous. This paper generalizes Hamilton and Slutsky’s (1990) endogenous timing games by assuming that players are averse to inequality in payoffs. I explore the theoretical implications of inequity aversion and compare them to the empirical evidence. I find that this explanation is able to organize most of the experimental evidence on endogenous timing games. However, inequity aversion is not able to explain delay in Hamilton and Slutsky’s endogenous timing games.

A Model of Positive Self-Image in Subjective Assessments, with Joel Sobel.
American Economic Review, 2005, Vol. 95, No. 5, 1386-1402. Download

This paper suggests a mechanism that describes individuals’ positive self image in subjective assessments of their relative abilities. The mechanism assumes individuals have heterogeneous production functions that determine ability as a function of multiple skills, individuals make skill-enhancing investments with the goal of maximizing their ability, and make ability comparisons using their own production function. Within this framework, the paper provides conditions under which there is positive self image. Positive self image is increasing in the ease of the task, the number of different skills needed for the task, and the variability of production technologies in the population.