Why Uninformed Agents (Pretend to) Know More

Abstract:     
Many social interactions (examples are market overreactions, high rates of acquisitions, strikes, wars) are the result of agents' overconfidence. Agents are in particular overconfident for difficult tasks. This paper analyzes overconfidence in the context of a statistical estimation problem. We find that it is rational to (i) be overconfident and (ii) to be notably overconfident if the task is difficult. The counterintuitive finding that uninformed agents which should be the least confident ones show the highest degree of overconfidence can be explained as a rational behavior.

Keywords: belief elicitation, probability assessment, shrinking, overconfidence, hard-easy effect

JEL Classification: C44, D81, D83

working papers series