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Confidence Interval Estimation Tasks and the Economics of Overconfidence

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Author Info

  • Cesarini, David

    ()
    (Department of Economics, London School of Economics)

  • Sandewall, Örjan

    ()
    (Department of Economics, London School of Economics)

  • Johannesson, Magnus

    ()
    (Dept. of Economics, Stockholm School of Economics)

Abstract

Experiments in psychology, where subjects estimate confidence intervals to a series of factual questions, have shown that individuals report far too narrow intervals. This has been interpreted as evidence of overconfidence in the preciseness of knowledge, a potentially serious violation of the rationality assumption in economics. Following these results a growing literature in economics has incorporated overconfidence in models of, for instance, financial markets. In this paper we investigate the robustness of results from confidence interval estimation tasks with respect to a number of manipulations: frequency assessments, peer frequency assessments, iteration, and monetary incentives. Our results suggest that a large share of the overconfidence in interval estimation tasks is an artifact of the response format. Using frequencies and monetary incentives reduces the measured overconfidence in the confidence interval method by about 65%. The results are consistent with the notion that subjects have a deep aversion to setting broad confidence intervals, a reluctance that we attribute to a socially rational trade-off between informativeness and accuracy.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 535.

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Length: 35 pages
Date of creation: 22 Sep 2003
Date of revision:
Handle: RePEc:hhs:hastef:0535

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Keywords: overconfidence; uncertainty; monetary incentives; experiments;

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References

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Citations

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Cited by:
  1. Gloede, Oliver & Menkhoff, Lukas, 2011. "Financial professionals' overconfidence:Is it experience, function, or attitude?," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Leibniz Universität Hannover dp-428, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  2. Markus Glaser & Martin Weber, 2007. "Overconfidence and trading volume," The Geneva Papers on Risk and Insurance Theory, Springer, vol. 32(1), pages 1-36, June.
  3. Glaser, Markus & Weber, Martin, 2005. "Overconfidence and Trading Volume," SIFR Research Report Series 40, Institute for Financial Research.
  4. Andrew Healy, 2005. "How Do People Learn by Listening to Others? Experimental Evidence from Thailand," Experimental 0512006, EconWPA.
  5. Marian Krajc, 2008. "Are the Unskilled Really That Unaware? Understanding Seemingly Biased Self-Assessments," CERGE-EI Working Papers wp373, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  6. Madiès, Thierry & Villeval, Marie Claire & Wasmer, Malgorzata, 2013. "Intergenerational attitudes towards strategic uncertainty and competition: A field experiment in a Swiss bank," European Economic Review, Elsevier, vol. 61(C), pages 153-168.
  7. Marie-Pierre Dargnies & Guillaume Hollard, 2008. "Incentives to learn calibration : a gender-dependent impact," Documents de travail du Centre d'Economie de la Sorbonne v08088, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  8. Koellinger, Ph.D. & Treffers, T., 2012. "Joy leads to Overconfidence, and a Simple Remedy," ERIM Report Series Research in Management ERS-2012-001-STR, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
  9. Sandra Ludwig & Julia Nafziger, 2011. "Beliefs about overconfidence," Theory and Decision, Springer, vol. 70(4), pages 475-500, April.
  10. repec:hal:journl:halshs-00348826 is not listed on IDEAS
  11. Proeger, Till & Meub, Lukas, 2014. "Overconfidence as a social bias: Experimental evidence," Economics Letters, Elsevier, vol. 122(2), pages 203-207.
  12. Pavlo Blavatskyy, 2009. "Betting on own knowledge: Experimental test of overconfidence," Journal of Risk and Uncertainty, Springer, vol. 38(1), pages 39-49, February.
  13. Marion Eberlein & Judith Przemeck, 2008. "Whom will you choose? - Collaborator Selection and Selector’s Self-Prediction," Bonn Econ Discussion Papers bgse12_2008, University of Bonn, Germany.
  14. Kohei Kawamura (University of Edinburgh), 2013. "Confidence and Competence in Communication," ESE Discussion Papers 222, Edinburgh School of Economics, University of Edinburgh.
  15. Johansson Stenman, Olof & Nordblom, Katarina, 2010. "Are Men Really More Overconfident than Women? - A Natural Field Experiment on Exam Behavior," Working Papers in Economics 461, University of Gothenburg, Department of Economics.
  16. Ryvkin, Dmitry & Krajč, Marian & Ortmann, Andreas, 2012. "Are the unskilled doomed to remain unaware?," Journal of Economic Psychology, Elsevier, vol. 33(5), pages 1012-1031.
  17. Simon, Mark & Shrader, Rodney C., 2012. "Entrepreneurial actions and optimistic overconfidence: The role of motivated reasoning in new product introductions," Journal of Business Venturing, Elsevier, vol. 27(3), pages 291-309.

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