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True overconfidence: The inability of rational information processing to account for apparent overconfidence

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  • Merkle, Christoph
  • Weber, Martin

Abstract

The better-than-average effect describes the tendency of people to perceive their skills and virtues as being above average. We derive a new experimental paradigm to distinguish between two possible explanations for the effect, namely rational information processing and overconfidence. Experiment participants evaluate their relative position within the population by stating their complete belief distribution. This approach sidesteps recent methodology concerns associated with previous research. We find that people hold beliefs about their abilities in different domains and tasks which are inconsistent with rational information processing. Both on an aggregated and an individual level, they show considerable overplacement. We conclude that overconfidence is not only apparent overconfidence but rather the consequence of a psychological bias.

Suggested Citation

  • Merkle, Christoph & Weber, Martin, 2011. "True overconfidence: The inability of rational information processing to account for apparent overconfidence," Organizational Behavior and Human Decision Processes, Elsevier, vol. 116(2), pages 262-271.
  • Handle: RePEc:eee:jobhdp:v:116:y:2011:i:2:p:262-271
    DOI: 10.1016/j.obhdp.2011.07.004
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    Cited by:

    1. Zahra Murad & Martin Sefton & Chris Starmer, 2016. "How do risk attitudes affect measured confidence?," Journal of Risk and Uncertainty, Springer, vol. 52(1), pages 21-46, February.
    2. Dasgupta, Utteeyo & Gangadharan, Lata & Maitra, Pushkar & Mani, Subha & Subramanian, Samyukta, 2015. "Choosing to be trained: Do behavioral traits matter?," Journal of Economic Behavior & Organization, Elsevier, vol. 110(C), pages 145-159.
    3. Louis Lévy-Garboua & Muniza Askari & Marco Gazel, 2017. "Confidence biases and learning among intuitive Bayesians," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01558394, HAL.
    4. Di Girolamo, Amalia & Harrison, Glenn W. & Lau, Morten I. & Swarthout, J. Todd, 2015. "Subjective belief distributions and the characterization of economic literacy," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 59(C), pages 1-12.
    5. Jean‐Pierre Benoît & Juan Dubra, 2011. "Apparent Overconfidence," Econometrica, Econometric Society, vol. 79(5), pages 1591-1625, September.
    6. Cheung, Stephen L. & Johnstone, Lachlan, 2017. "True Overconfidence, Revealed through Actions: An Experiment," IZA Discussion Papers 10545, Institute for the Study of Labor (IZA).
    7. Harrison, Glenn W. & Martínez-Correa, Jimmy & Swarthout, J. Todd & Ulm, Eric R., 2017. "Scoring rules for subjective probability distributions," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 430-448.
    8. Hoeppner Sven & Kirchner Christian, 2016. "Ex ante versus Ex post Governance: A Behavioral Perspective," Review of Law & Economics, De Gruyter, vol. 12(2), pages 227-259, July.
    9. Louis Lévy-Garboua & Muniza Askari & Marco Gazel, 2015. "Confidence Biases and Learning among Intuitive Bayesians," Documents de travail du Centre d'Economie de la Sorbonne 15080, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    10. Jean-Pierre Benoît & Juan Dubra & Don A. Moore, 2015. "Does The Better-Than-Average Effect Show That People Are Overconfident?: Two Experiments," Journal of the European Economic Association, European Economic Association, vol. 13(2), pages 293-329, April.
    11. Tomas Miklanek, 2017. "Ego-utility and Endogenous Information Acquisition; An Experimental Study," CERGE-EI Working Papers wp582, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    12. repec:arp:ijefrr:2018:p:30-37 is not listed on IDEAS
    13. Leitner, Stephan & Rausch, Alexandra & Behrens, Doris A., 2017. "Distributed investment decisions and forecasting errors: An analysis based on a multi-agent simulation model," European Journal of Operational Research, Elsevier, vol. 258(1), pages 279-294.
    14. David Hirshleife, 2015. "Behavioral Finance," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 133-159, December.
    15. Schwardmann, Peter & van der Weele, Joel, 2017. "Deception and Self-Deception," Rationality and Competition Discussion Paper Series 25, CRC TRR 190 Rationality and Competition.
    16. repec:eee:jbfina:v:84:y:2017:i:c:p:68-87 is not listed on IDEAS

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