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)
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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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Length: 35 pages Date of creation: 22 Sep 2003 Date of revision: Handle: RePEc:hhs:hastef:0535
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Find related papers by JEL classification: C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General Z13 - Other Special Topics - - Cultural Economics - - - Social Norms and Social Capital; Social Networks Economic Anthropology
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