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Overconfidence in absolute and relative performance: The regression hypothesis and Bayesian updating

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  • Grieco, Daniela
  • Hogarth, Robin M.

Abstract

Studies have found that people are overconfident in estimation involving difficult tasks but underconfident in easy tasks. Conversely, they are overconfident in placing themselves in easy tasks but underconfident in hard tasks. These findings can be explained by a regression hypothesis that implies random errors in estimation as well as by rational Bayesian updating (that implies no random error). We test these hypotheses in five experiments. We find overconfidence in estimation involving hard tasks but underconfidence in easy tasks. However, for placement (involving both easy and hard tasks) we find no overconfidence, regression effects due to low and high anchor points, and extreme underconfidence when people choose between multiple alternatives. On the other hand, when given precise information about absolute performance, people's re-assessments of relative performance are consistent with the Bayesian model. Since placement judgments are important in many competitive settings, our results emphasize the need for more research to identify their determinants.

Suggested Citation

  • Grieco, Daniela & Hogarth, Robin M., 2009. "Overconfidence in absolute and relative performance: The regression hypothesis and Bayesian updating," Journal of Economic Psychology, Elsevier, vol. 30(5), pages 756-771, October.
  • Handle: RePEc:eee:joepsy:v:30:y:2009:i:5:p:756-771
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Isabelle Vialle & Luis Santos-Pinto & Jean-Louis Rullière, 2011. "Self-Confidence and Teamwork : An Experimental Test," Working Papers 1126, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    2. Krawczyk, Michał, 2012. "Incentives and timing in relative performance judgments: A field experiment," Journal of Economic Psychology, Elsevier, vol. 33(6), pages 1240-1246.
    3. Øglend, Atle & Osmundsen, Petter & Lorentzen, Sindre, 2016. "Cost Overrun at the Norwegian Continental Shelf: The element of surprise," UiS Working Papers in Economics and Finance 2016/3, University of Stavanger.
    4. Jean‐Pierre Benoît & Juan Dubra, 2011. "Apparent Overconfidence," Econometrica, Econometric Society, vol. 79(5), pages 1591-1625, September.
    5. Juan Dubra & Jean-Pierre Benoit, 2011. "Apparent Overconfidence," Documentos de Trabajo/Working Papers 1106, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
    6. Royal, Andrew & Tasoff, Joshua, 2017. "When higher productivity hurts: The interaction between overconfidence and capital," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 67(C), pages 131-142.
    7. Helen X. H. Bao & Steven Haotong Li, 2016. "Overconfidence And Real Estate Research: A Survey Of The Literature," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(04), pages 1-24, September.
    8. Osmundsen, Petter & Roll, Kristin Helen, 2016. "Rig rates and drilling speed: reinforcing effects," UiS Working Papers in Economics and Finance 2016/4, University of Stavanger.
    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. Hyytinen, Ari & Lahtonen, Jukka & Pajarinen, Mika, 2012. "Entrepreneurial optimism and survival," Research Discussion Papers 20/2012, Bank of Finland.
    11. Artinger, Sabrina, 2013. "Demand uncertainty in skill-based competition," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79962, Verein für Socialpolitik / German Economic Association.
    12. Natalia Karelaia & Robin Hogarth, 2010. "The attraction of uncertainty: Interactions between skill and levels of uncertainty in market-entry games," Journal of Risk and Uncertainty, Springer, vol. 41(2), pages 141-166, October.
    13. 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.
    14. De Paola, Maria & Gioia, Francesca & Scoppa, Vincenzo, 2014. "Overconfidence, omens and gender heterogeneity: Results from a field experiment," Journal of Economic Psychology, Elsevier, vol. 45(C), pages 237-252.
    15. Kris Hardies & Diane Breesch & Joël Branson, 2011. "Male and female auditors' overconfidence," Managerial Auditing Journal, Emerald Group Publishing, vol. 27(1), pages 105-118, November.
    16. Tatyana Deryugina, 2013. "How do people update? The effects of local weather fluctuations on beliefs about global warming," Climatic Change, Springer, vol. 118(2), pages 397-416, May.
    17. repec:eee:jbfina:v:84:y:2017:i:c:p:68-87 is not listed on IDEAS
    18. repec:kap:theord:v:84:y:2018:i:3:d:10.1007_s11238-017-9612-1 is not listed on IDEAS
    19. Brown, Jason L. & Farrington, Sukari & Sprinkle, Geoffrey B., 2016. "Biased self-assessments, feedback, and employees' compensation plan choices," Accounting, Organizations and Society, Elsevier, vol. 54(C), pages 45-59.

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