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An Unlucky Feeling: Overconfidence and Noisy Feedback

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  • Grossman, Zachary
  • Owens, David

Abstract

How does overconfidence arise and how does it persist in the face of experience and feedback? In an experimental setting, we examine how individuals’ beliefs about their own performance on a quiz react to noisy, but unbiased feedback. In a control treatment, each participant expresses her beliefs about another participant’s performance, rather than her own. On average, they express accurate posteriors about others’ scores, but they overestimate their own score, believing themselves to have received ‘unlucky’ feedback. However, this driven by overconfident priors, as opposed to biased information processing. We also find that, while feedback improves estimates about the performance on which it is based, this learning does not translate into improved estimates of related performances. This suggests that people use performance feedback to update their beliefs about their ability differently than they do to update their beliefs about their performance, which may contribute to the persistence of overconfidence.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt13r2f3gt.

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Date of creation: 11 Nov 2010
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Handle: RePEc:cdl:ucsbec:qt13r2f3gt

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Keywords: overconfidence; overestimation; learning; Bayes rule; biased updating; learning transfer; experiments; quadratic scoring rule; Social and Behavioral Sciences;

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References

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  1. Banks, Jeffrey S. & Sobel, Joel., 1985. "Equilibrium Selection in Signaling Games," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 565, California Institute of Technology, Division of the Humanities and Social Sciences.
  2. Jeremy Clark & Lana Friesen, 2006. "Overconfidence in Forecasts of Own Performance: An Experimental Study," Working Papers in Economics, University of Canterbury, Department of Economics and Finance 06/09, University of Canterbury, Department of Economics and Finance.
  3. 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).
  4. 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, MIT Press, vol. 7(5), pages 1101-1139, 09.
  5. Ulrike Malmendier & Geoffrey Tate, 2004. "Who Makes Acquisitions? CEO Overconfidence and the Market's Reaction," NBER Working Papers 10813, National Bureau of Economic Research, Inc.
  6. Kagel, John H., 1995. "Cross-game learning: Experimental evidence from first-price and English common value auctions," Economics Letters, Elsevier, Elsevier, vol. 49(2), pages 163-170, August.
  7. Markus Mobius & Muriel Niederle & Paul Niehaus & Tanya S. Rosenblat, 2011. "Managing self-confidence: theory and experimental evidence," Working Papers, Federal Reserve Bank of Boston 11-14, Federal Reserve Bank of Boston.
  8. Gary Charness & Aldo Rustichini & Jeroen van de Ven, 2011. "Self-Confidence and Strategic Deterrence," Tinbergen Institute Discussion Papers, Tinbergen Institute 11-151/1, Tinbergen Institute.
  9. David Cooper & John Kagel, 2008. "Learning and transfer in signaling games," Economic Theory, Springer, Springer, vol. 34(3), pages 415-439, March.
  10. Juan Dubra & Jean-Pierre Benoit, 2011. "Apparent Overconfidence," Documentos de Trabajo/Working Papers, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo. 1106, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
  11. David Cooper & John H. Kagel, 2003. "Lessons Learned: Generalizing Learning Across Games," American Economic Review, American Economic Association, American Economic Association, vol. 93(2), pages 202-207, May.
  12. 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, Elsevier, vol. 80(3), pages 532-545.
  13. Gary Charness & Aldo Rustichini & Jeroen van de Ven, 2011. "Self-Confidence and Strategic Deterrence," Tinbergen Institute Discussion Papers, Tinbergen Institute 11-151/1, Tinbergen Institute.
  14. Erik Hoelzl & Aldo Rustichini, 2005. "Overconfident: Do You Put Your Money On It?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 115(503), pages 305-318, 04.
  15. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
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Citations

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Cited by:
  1. Gary Charness & Aldo Rustichini & Jeroen van de Ven, 2013. "Self-Confidence and Strategic Behavior," CESifo Working Paper Series, CESifo Group Munich 4517, CESifo Group Munich.
  2. Markus M. Mobius & Muriel Niederle & Paul Niehaus & Tanya S. Rosenblat, 2011. "Managing Self-Confidence: Theory and Experimental Evidence," NBER Working Papers 17014, National Bureau of Economic Research, Inc.
  3. Aanesen, Margrethe & Czajkowski, Mikolaj & Falk-Peterson, Jannike & Hanley, Nicholas & LaRiviere, Jacob & Tinch, Dugald, 2014. "Effects of Experience, Knowledge and Signals on Willingness to Pay for a Public Good," Stirling Economics Discussion Papers, University of Stirling, Division of Economics 2014-04, University of Stirling, Division of Economics.
  4. Parkhurst, Gregory M. & Nowell, Clifford, 0. "The Role of Confidence in Truthful Revelation of Private Values," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, Northeastern Agricultural and Resource Economics Association.
  5. Camille Cornand & Frank Heinemann, 2010. "Measuring Agents' Reaction to Private and Public Information in Games with Strategic Complementarities," CESifo Working Paper Series, CESifo Group Munich 2947, CESifo Group Munich.
  6. Czajkowski, Mikolaj & Hanley, Nicholas & LaRiviere, Jacob & Simpson, Katherine, 2014. "What is the Causal Effect of Information and Learning about a Public Good on Willingness to Pay?," Stirling Economics Discussion Papers, University of Stirling, Division of Economics 2014-05, University of Stirling, Division of Economics.
  7. Jeffrey V. Butler, 2013. "Inequality and Relative Ability Beliefs," EIEF Working Papers Series, Einaudi Institute for Economics and Finance (EIEF) 1305, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2013.
  8. Matthew Wiswall & Basit Zafar, 2011. "Belief updating among college students: evidence from experimental variation in information," Staff Reports, Federal Reserve Bank of New York 516, Federal Reserve Bank of New York.
  9. Gary Charness & Aldo Rustichini & Jeroen van de Ven, 2011. "Self-Confidence and Strategic Deterrence," Tinbergen Institute Discussion Papers, Tinbergen Institute 11-151/1, Tinbergen Institute.
  10. Gary Charness & Aldo Rustichini & Jeroen van de Ven, 2011. "Self-Confidence and Strategic Deterrence," Tinbergen Institute Discussion Papers, Tinbergen Institute 11-151/1, Tinbergen Institute.
  11. repec:stl:stledp:2014-06 is not listed on IDEAS

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