The positive role of overconfidence and Optimism in Investment Policy b Simon gervais J. B. Heaton errance Deans 4 September 2002 Y *This paper is an updated version of a previous working paper, Capital Budgeting in the Presence of Managerial Overconfidence and Optimism, by the same authors. Financial support by the Rodney L. white Center for Financial Research is gratefully acknowledged. The authors would like to thank Andrew Abel, Jonathan Berk, Domenico Cuoco, David Denis, Janice Eberly, Robert Goldstein, Peter Swan, and seminar participants at the 2000 meetings of the European Finance Association, the 2001 meetings of the American Finance Association, and the Wharton School for their comments and suggestions. Heaton acknowledges that the opinions expressed here are his own, and do not reflect the position of Bartlit Beck Herman Palenchar scott or its attorneys. All remaining errors are of course the authors'responsibility. fInance Department, Wharton School, University of Pennsylvania, Steinberg Hall-Dietrich Hall, Suite 2300, Philadelphia, PA 19104-6367, gervais @wharton. upenn. edu, (215)898-2370 f Adjunct Associate Professor of Finance, Duke University Fuqua School of Business and Duke Global Capital Markets Center, and Associate, Bartlit Beck Herman Palenchar Scott, 54 West Hubbard, Suite 300, Chicago, IL 60610, jb. heaton obartlit-beck com, (312)494-4425 sHaas School of Business, 545 Student Services#1900, University of California at Berkeley, Berkeley CA 94720-1900, odean @haas. berkeley. edu, (510)642-6767The Positive Role of Overconfidence and Optimism in Investment Policy∗ by Simon Gervais† J. B. Heaton‡ Terrance Odean§ 4 September 2002 ∗This paper is an updated version of a previous working paper, “Capital Budgeting in the Presence of Managerial Overconfidence and Optimism,” by the same authors. Financial support by the Rodney L. White Center for Financial Research is gratefully acknowledged. The authors would like to thank Andrew Abel, Jonathan Berk, Domenico Cuoco, David Denis, Janice Eberly, Robert Goldstein, Peter Swan, and seminar participants at the 2000 meetings of the European Finance Association, the 2001 meetings of the American Finance Association, and the Wharton School for their comments and suggestions. Heaton acknowledges that the opinions expressed here are his own, and do not reflect the position of Bartlit Beck Herman Palenchar & Scott or its attorneys. All remaining errors are of course the authors’ responsibility. †Finance Department, Wharton School, University of Pennsylvania, Steinberg Hall - Dietrich Hall, Suite 2300, Philadelphia, PA 19104-6367, gervais@wharton.upenn.edu, (215) 898-2370. ‡Adjunct Associate Professor of Finance, Duke University Fuqua School of Business and Duke Global Capital Markets Center, and Associate, Bartlit Beck Herman Palenchar & Scott, 54 West Hubbard, Suite 300, Chicago, IL 60610, jb.heaton@bartlit-beck.com, (312) 494-4425. §Haas School of Business, 545 Student Services #1900, University of California at Berkeley, Berkeley, CA 94720-1900, odean@haas.berkeley.edu, (510) 642-6767