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Estimating the relationship between skill and overconfidence

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  • Feld, Jan
  • Sauermann, Jan
  • De Grip, Andries

Abstract

The Dunning–Kruger effect states that low performers vastly overestimate their performance while high performers more accurately assess their performance. Researchers usually interpret this empirical pattern as evidence that the low skilled are vastly overconfident while the high skilled are more accurate in assessing their skill. However, measurement error alone can lead to a negative relationship between performance and overestimation, even if skill and overconfidence are unrelated. To clarify the role of measurement error, we restate the Dunning–Kruger effect in terms of skill and overconfidence. We show that we can correct for bias caused by measurement error with an instrumental variable approach that uses a second performance as instrument. We then estimate the Dunning–Kruger effect in the context of the exam grade predictions of economics students, using their grade point average as an instrument for their exam grade. Our results show that the unskilled are more overconfident than the skilled. However, as we predict in our methodological discussion, this relationship is significantly weaker than ordinary least squares estimates suggest.

Suggested Citation

  • Feld, Jan & Sauermann, Jan & De Grip, Andries, 2017. "Estimating the relationship between skill and overconfidence," Working Paper Series 6170, Victoria University of Wellington, School of Economics and Finance.
  • Handle: RePEc:vuw:vuwecf:6170
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    File URL: http://researcharchive.vuw.ac.nz/handle/10063/6170
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    References listed on IDEAS

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    1. Jan Feld & Nicolás Salamanca & Daniel S. Hamermesh, 2016. "Endophilia or Exophobia: Beyond Discrimination," Economic Journal, Royal Economic Society, vol. 126(594), pages 1503-1527, August.
    2. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
    3. Feld, Jan & Sauermann, Jan & de Grip, Andries, 2017. "Estimating the relationship between skill and overconfidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 68(C), pages 18-24.
    4. Krajc, Marian & Ortmann, Andreas, 2008. "Are the unskilled really that unaware? An alternative explanation," Journal of Economic Psychology, Elsevier, vol. 29(5), pages 724-738, November.
    5. Jan Feld & Ulf Zölitz, 2017. "Understanding Peer Effects: On the Nature, Estimation, and Channels of Peer Effects," Journal of Labor Economics, University of Chicago Press, vol. 35(2), pages 387-428.
    6. Schlösser, Thomas & Dunning, David & Johnson, Kerri L. & Kruger, Justin, 2013. "How unaware are the unskilled? Empirical tests of the “signal extraction” counterexplanation for the Dunning–Kruger effect in self-evaluation of performance," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 85-100.
    7. Ryvkin, Dmitry & Krajč, Marian & Ortmann, Andreas, 2012. "Are the unskilled doomed to remain unaware?," Journal of Economic Psychology, Elsevier, vol. 33(5), pages 1012-1031.
    8. Ehrlinger, Joyce & Johnson, Kerri & Banner, Matthew & Dunning, David & Kruger, Justin, 2008. "Why the unskilled are unaware: Further explorations of (absent) self-insight among the incompetent," Organizational Behavior and Human Decision Processes, Elsevier, vol. 105(1), pages 98-121, January.
    9. Marian Krajc, 2008. "Are the Unskilled Really That Unaware? Understanding Seemingly Biased Self-Assessments," CERGE-EI Working Papers wp373, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    10. Dan Lovallo & Colin Camerer, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March.
    11. Jan Feld & Ulf Zölitz, 2017. "Understanding Peer Effects: On the Nature, Estimation, and Channels of Peer Effects," Journal of Labor Economics, University of Chicago Press, vol. 35(2), pages 387-428.
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    1. Feld, Jan & Sauermann, Jan & de Grip, Andries, 2017. "Estimating the relationship between skill and overconfidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 68(C), pages 18-24.

    More about this item

    Keywords

    Dunning–Kruger effect; Overconfidence; Judgment error; Measurement error; Instrumental variable;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions

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