Monetary incentives and overconfidence in academic performance: An experimental study

In this paper, we analyze students’ overconfidence bias regarding potential and actual academic performance under both hypothetical and real monetary incentives. Students enrolled in a Microeconomics course were offered the possibility to set their own goal before performing different types of exams and, immediately after completing them, to postdict their own grade. Controlling for potential driving factors of students’ overconfidence such as their cognitive abilities, academic record, risk preferences, and self-reported academic confidence, we find that real monetary incentives mitigate overestimation of potential achievements and eliminate overestimation of actual achievements. This finding is compelling, given the common interpretation of overconfidence as a conscious bias: if monetary incentives can eliminate subjects’ overconfidence, as our results indicate, it might suggest that overconfidence is not a psychological bias at all. Moreover, the use of real money does not reduce but instead enhances the presence of the Dunning-Kruger bias when we use students’ academic records to measure their actual skill.