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Competing to Be Certain (But Wrong): Market Dynamics and Excessive Confidence in Judgment

Author

Listed:
  • Joseph R. Radzevick

    () (Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

  • Don A. Moore

    () (Haas School of Business, University of California, Berkeley, Berkeley, California 94720)

Abstract

In this paper, we investigate how market competition contributes to the expression of overconfidence among those competing for influence. We find evidence that market competition exacerbates the tendency to express excessive confidence. This evidence comes from experiments in which advisors attempt to sell their advice. In the first, advisors must compete with other advice sellers. In the second, advisors and their customers are paired. Advisors are overconfident in both studies and it helps advisors sell their advice. However, competition between advisors in the market further exacerbates overconfidence. In a third study, we demonstrate that the market competition drives overconfidence even when advisors vary in quality. We also investigate the strategic expressions and interpretations of confidence by both sides in the exchange. This paper was accepted by Peter Wakker, decision analysis.

Suggested Citation

  • Joseph R. Radzevick & Don A. Moore, 2011. "Competing to Be Certain (But Wrong): Market Dynamics and Excessive Confidence in Judgment," Management Science, INFORMS, vol. 57(1), pages 93-106, January.
  • Handle: RePEc:inm:ormnsc:v:57:y:2011:i:1:p:93-106
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    File URL: http://dx.doi.org/10.1287/mnsc.1100.1255
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    References listed on IDEAS

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    1. Kenneth C. Lichtendahl, Jr. & Robert L. Winkler, 2007. "Probability Elicitation, Scoring Rules, and Competition Among Forecasters," Management Science, INFORMS, vol. 53(11), pages 1745-1755, November.
    2. Moore, Don A. & Klein, William M.P., 2008. "Use of absolute and comparative performance feedback in absolute and comparative judgments and decisions," Organizational Behavior and Human Decision Processes, Elsevier, vol. 107(1), pages 60-74, September.
    3. Ulrike Malmendier & Geoffrey Tate, 2005. "CEO Overconfidence and Corporate Investment," Journal of Finance, American Finance Association, vol. 60(6), pages 2661-2700, December.
    4. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-137, February.
    5. repec:kap:expeco:v:1:y:1998:i:1:p:43-62 is not listed on IDEAS
    6. Reinhard Selten, 1998. "Axiomatic Characterization of the Quadratic Scoring Rule," Experimental Economics, Springer;Economic Science Association, vol. 1(1), pages 43-61, June.
    7. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    8. McKenzie, Craig R.M. & Liersch, Michael J. & Yaniv, Ilan, 2008. "Overconfidence in interval estimates: What does expertise buy you?," Organizational Behavior and Human Decision Processes, Elsevier, vol. 107(2), pages 179-191, November.
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    Cited by:

    1. Pirinsky, Christo, 2013. "Confidence and economic attitudes," Journal of Economic Behavior & Organization, Elsevier, vol. 91(C), pages 139-158.

    More about this item

    Keywords

    overconfidence; advice; competition; markets; judgment;

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