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Cognitive Uncertainty and Overconfidence

Author

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  • Andrea Amelio

    (University of Bonn)

Abstract

Overconfidence is one of the most ubiquitous cognitive bias. There is copious evidence of overconfidence being relevant in a diverse set of economic domains. In this paper, we relate the recent concept of cognitive uncertainty with overconfidence. Cognitive uncertainty represents a decision maker's uncertainty about her action optimality. We present a simple model of overconfidence based on the concept of cognitive uncertainty. The model relates the concepts theoretically and generates testable predictions. We propose an experimental paradigm to cleanly identify such theoretical relationships. In particular, we focus on overplacement and we find that, as predicted, cognitive uncertainty is inversely related to overplacement. Exogenously manipulating cognitive uncertainty through compound choices, we are able to show a causal relationship with overplacement. Evidence on these relationships allows to link overplacement with other behavioral anomalies explained through cognitive uncertainty.

Suggested Citation

  • Andrea Amelio, 2022. "Cognitive Uncertainty and Overconfidence," ECONtribute Discussion Papers Series 173, University of Bonn and University of Cologne, Germany.
    • Handle: RePEc:ajk:ajkdps:173
    as

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    File URL: https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_173_2022.pdf
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    References listed on IDEAS

    as
    1. Ulrike Malmendier & Geoffrey Tate, 2005. "CEO Overconfidence and Corporate Investment," Journal of Finance, American Finance Association, vol. 60(6), pages 2661-2700, December.
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    More about this item

    Keywords

    Cognitive Uncertainty; Overconfidence; Overplacement; Cognitive Noise; Experiments;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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