Overconfidence on public information

This work sets the market maker as overconfident and shows that this will lead to a higher informed trading intensity, a more efficient market, a larger informed profit and a lower adverse selection.

► I present a model where the market maker owns a public signal and overestimates its precision. ► I examine the effects of overconfidence on the equilibrium outcomes. ► Overconfidence will enhance the informed trading intensity, profit and market efficiency. ► Overconfidence will decrease the adverse selection.