The many faces of confidence: sensitivity and meta-confidence in economic decision-making

While the effects of overconfidence on economic outcomes are well-documented, the implications of confidence sensitivity, the extent to which confidence judgments are informative about true abilities, have been largely overlooked. Yet in many contexts, a lack of sensitivity may be just as detrimental as overconfidence, as it prevents individuals from accurately identifying their strengths and weaknesses, a skill that is particularly crucial in educational and career choices. Moreover, recent research in cognitive psychology suggests that individuals can form informative beliefs about their own confidence sensitivity, but whether such "meta-confidence" influences their behavior remains an open question. To shed light on these issues, we design a laboratory experiment studying individuals' compensation scheme choices using a canonical economic framework (Niederle & Vesterlund, 2007), in which we measure confidence sensitivity and meta-confidence and allow participants to acquire information about their own ability prior to making their choice. Our results show that higher confidence sensitivity significantly increases participants' earnings by making them more likely to choose payoff-maximizing compensation schemes. In addition, using insights from a stylized model of confidence formation in which individuals hold beliefs about the informativeness of their own confidence, we derive testable implications for how meta-confidence shapes individuals' reliance on their confidence judgments and their feedback acquisition strategies. We test these implications causally by implementing a manipulation in our experiment designed to reduce participants' meta-confidence. We find that lower meta-confidence does not affect individuals' reliance on their confidence when choosing compensation schemes, but significantly increases their willingness to seek performance feedback prior to making their decision.