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An unlucky feeling: Overconfidence and noisy feedback

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Author Info

  • Grossman, Zachary
  • Owens, David

Abstract

How do individuals’ beliefs respond to ego-relevant information? After receiving noisy, but unbiased performance feedback, participants in an experiment overestimate their own scores on a quiz and believe their feedback to be ‘unlucky’, estimating that it under-represents their score by 13%. However, they exhibit no such overconfidence in non-ego-relevant beliefs—in this case, estimates of others’ scores. Comparing subjects’ belief-updating to the Bayesian benchmark, we find that this ‘unlucky feeling’ is largely due to overconfident priors, with biased updating driving overconfidence only among the participants with the worst-calibrated beliefs. This suggests that social comparisons contribute to the biased response to feedback on relative performance observed in other studies. While feedback improves performance estimates, this learning does not translate into improved estimates of subsequent performances. This suggests that beliefs about ability are updated differently than beliefs about a particular performance, contributing to the persistence of overconfidence.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 84 (2012)
Issue (Month): 2 ()
Pages: 510-524

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Handle: RePEc:eee:jeborg:v:84:y:2012:i:2:p:510-524

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Web page: http://www.elsevier.com/locate/jebo

Related research

Keywords: Overconfidence; Feedback; Overestimation; Absolute performance; Bayesian updating; Biased updating; Information processing; Learning transfer; Cross-game learning;

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References

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  1. Kagel, John H., 1995. "Cross-game learning: Experimental evidence from first-price and English common value auctions," Economics Letters, Elsevier, vol. 49(2), pages 163-170, August.
  2. Jeremy Clark & Lana Friesen, 2006. "Overconfidence in Forecasts of Own Performance: An Experimental Study," Working Papers in Economics 06/09, University of Canterbury, Department of Economics and Finance.
  3. Markus Mobius & Muriel Niederle & Paul Niehaus & Tanya S. Rosenblat, 2011. "Managing self-confidence: theory and experimental evidence," Working Papers 11-14, Federal Reserve Bank of Boston.
  4. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
  5. repec:dgr:uvatin:2011151 is not listed on IDEAS
  6. David J. Cooper & John H. Kagel, 2009. "The Role of Context and Team Play in Cross-Game Learning," Journal of the European Economic Association, MIT Press, vol. 7(5), pages 1101-1139, 09.
  7. Gary Charness & Aldo Rustichini & Jeroen van de Ven, 2011. "Self-Confidence and Strategic Deterrence," Tinbergen Institute Discussion Papers 11-151/1, Tinbergen Institute.
  8. Banks, Jeffrey S & Sobel, Joel, 1987. "Equilibrium Selection in Signaling Games," Econometrica, Econometric Society, vol. 55(3), pages 647-61, May.
  9. Ertac, Seda, 2011. "Does self-relevance affect information processing? Experimental evidence on the response to performance and non-performance feedback," Journal of Economic Behavior & Organization, Elsevier, vol. 80(3), pages 532-545.
  10. Juan Dubra & Jean-Pierre Benoit, 2011. "Apparent Overconfidence," Documentos de Trabajo/Working Papers 1106, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
  11. Burks, Stephen V. & Carpenter, Jeffrey P. & Götte, Lorenz & Rustichini, Aldo, 2010. "Overconfidence is a Social Signaling Bias," IZA Discussion Papers 4840, Institute for the Study of Labor (IZA).
  12. David Cooper & John H. Kagel, 2003. "Lessons Learned: Generalizing Learning Across Games," American Economic Review, American Economic Association, vol. 93(2), pages 202-207, May.
  13. Erik Hoelzl & Aldo Rustichini, 2005. "Overconfident: Do You Put Your Money On It?," Economic Journal, Royal Economic Society, vol. 115(503), pages 305-318, 04.
  14. David Cooper & John Kagel, 2008. "Learning and transfer in signaling games," Economic Theory, Springer, vol. 34(3), pages 415-439, March.
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Citations

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Cited by:
  1. Matthew Wiswall & Basit Zafar, 2011. "Belief updating among college students: evidence from experimental variation in information," Staff Reports 516, Federal Reserve Bank of New York.
  2. Markus Mobius & Muriel Niederle & Paul Niehaus & Tanya S. Rosenblat, 2011. "Managing self-confidence: theory and experimental evidence," Working Papers 11-14, Federal Reserve Bank of Boston.
  3. Jeffrey V. Butler, 2013. "Inequality and Relative Ability Beliefs," EIEF Working Papers Series 1305, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2013.
  4. Gary Charness & Aldo Rustichini & Jeroen van de Ven, 2013. "Self-Confidence and Strategic Behavior," CESifo Working Paper Series 4517, CESifo Group Munich.
  5. Gary Charness & Aldo Rustichini & Jeroen van de Ven, 2011. "Self-Confidence and Strategic Deterrence," Tinbergen Institute Discussion Papers 11-151/1, Tinbergen Institute.
  6. repec:dgr:uvatin:2011151 is not listed on IDEAS

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