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Journal of Economic Behavior & Organization 81 (2012) 699–711 Contents lists available at SciVerse ScienceDirectJournal of Economic Behavior & Organizationj ourna l ho me pag e: www.elsevier.com/locate/j ebo Overconfidence, monetary policy committees and chairman dominanceCarl Andreas Claussena,∗, Egil Matsenb, Øistein Røislandc, Ragnar Torvikb a Sveriges Riksbank, Sweden b Norwegian University of Science and Technology, Norway c Norges Bank, NorwayA R T I C L E I N F OArticle history: Received 24 June 2011 Received in revised form 10 November 2011 Accepted 1 December 2011 Available online 9 December 2011JEL classification: D02 D71 E58Keywords: Central bank governance Monetary policy committees Overconfidence Agenda-setting IntroductionA B S T R A C TMonetary policy decisions are typically characterized by three features: (i) decisions are made by a committee, (ii) the committee members often disagree, and (iii) the chairman is almost never on the losing side in the vote. We show that the combination of overconfident policymakers and a chairman with agenda-setting rights can explain all these features. The optimal agenda-setting power to the chairman is a strictly concave function of the degree of overconfidence. We also show that the quality of advice produced by the central bank staff is higher in a flat organization than in a hierarchical one. © 2011 Elsevier B.V. All rights reserved.Overconfidence is arguably the best established cognitive bias in the psychology of judgment.1 DellaVigna (2009, p. 341) compactly summarize the bias, arguing that people tend to “. . .over-estimate their performance in tasks requiring ability, including the precision of their knowledge.” Overconfidence has been documented among decision makers in many professions, including physicians, investment bankers, engineers, lawyers and managers.2 In this paper, we investigate the consequences of possible overconfidence among decision makers involved in monetary policy decisions.3 We show that overconfidence yields predictions about monetary policymaking that is consistent with a set of stylized facts that cannot Corresponding author. E-mail addresses: [email protected] (C.A. Claussen), [email protected] (E. Matsen), [email protected] (Ø. Røisland), [email protected] (R. Torvik). 1 Researchers have documented many other biases in information processing (see, e.g., the surveys by Rabin, 1998 and DellaVigna, 2009), but according to DeBondt and Thaler (1995, p. 389) overconfidence is perhaps the most robust finding in the psychology of judgment. 2 See Odean (1998, p. 1892) for references to studies of these and other professions. 3 To our knowledge, there are no investigations of monetary policymakers targeted directly at testing overconfidence, but it would be hard to argue that they are exempted from such a common cognitive bias. Apel et al.’s (2010) questionnaire survey evidence from Swedish monetary policymakers contains information that is clearly consistent with overconfidence. More generally, the low-predictability, fluid environment in which monetary policymakers typically operate is exactly the type of situation where overconfidence can easily prevail (see, e.g., Odean, 1998). We discuss these and other studies in more detail in Section 2 below.0167-2681/$ – see front matter © 2011 Elsevier B.V. All rights reserved. doi:10.1016/j.jebo.2011.12.003

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