True Overconfidence: The Inability of Rational Information Processing to Account for Apparent Overconfidence

Abstract:     
The better-than-average effect describes the tendency of people to perceive their skills and virtues as being above average. We derive a new experimental paradigm to distinguish between two possible explanations for the effect, namely rational information processing and overconfidence. Experiment participants evaluate their relative position within the population by stating their complete belief distribution. This approach sidesteps recent methodology concerns associated with previous research. We find that people hold beliefs about their abilities in different domains and tasks which are inconsistent with rational information processing. Both on an aggregated and an individual level, they show considerable overplacement. We conclude that overconfidence is not only apparent overconfidence but rather the consequence of a psychological bias.

Number of Pages in PDF File: 43

Keywords: Overconfidence, Better-than-average effect, Overplacement, Bayesian updating, Belief distribution

JEL Classification: C90, G10

Accepted Paper Series