Delusions of Grandeur and Their Benefits (and Hazards)

2026-06-01

AI Summary

This study investigates how individuals’ environmental beliefs—particularly optimistic bias—shape experimental behavior, aggregate output, and inequality when they attend to absolute versus relative wealth. By integrating agent-based modeling, stochastic process analysis, and game-theoretic reasoning within a group tournament framework, the research demonstrates that while optimistic beliefs significantly enhance overall productivity, they simultaneously exacerbate wealth inequality. These findings offer a micro-theoretical explanation for the empirically observed positive correlation between entrepreneurial activity and inequality, highlighting how cognitive biases interact with incentive structures to influence economic outcomes.

Abstract

We study a population-wide tournament in which agents, who care both about their absolute and relative wealth, experiment by searching over correlated objects. We explore the role of the agents' beliefs about the environment; namely, the stochastic processes corresponding to their experimentation. We find that although optimism leads to higher output, it also produces greater inequality. We connect these observations with empirical evidence suggesting a positive relationship between inequality and entrepreneurship.

Problem

• delusions of grandeur
• optimism
• wealth inequality
• entrepreneurship
• stochastic processes

Innovation

• optimism
• relative wealth
• experimentation
• inequality
• entrepreneurship