Grubb (2015) on Overconfident Consumers

Michael D. Grubb, “Overconfident Consumers in the Marketplace.” Journal of Economic Perspectives 29(4): 9-36, Fall 2015.

• Overconfidence encompasses both excessive optimism and flattering views of the precision of beliefs. For instance, people are overconfident about their future ability to exercise self-control or to pay attention to the potential of looming high fees.

• Overconfidence harms consumers, and competitive markets do not necessarily mitigate overconfidence – they may even exacerbate its costs; rebates and gym memberships are canonical instances.

• Complex contract terms can take advantage of overconfident consumers. 

• Overconfident consumers can be the source of a subsidy to fully rational consumers. 

• Price controls could serve consumer and social welfare in the presence of overconfident consumers.