Estimating the Relationship between Skill and Overconfidence

27 Pages Posted: 26 Mar 2017

See all articles by Jan Feld

Jan Feld

Victoria University of Wellington - Te Herenga Waka - Victoria Business School

Jan Sauermann

IFAU - Institute for Labour Market Policy Evaluation; SOFI, Stockholm University; IZA; Maastricht University - Research Centre for Education and the Labour Market (ROA)

Andries de Grip

Maastricht School of Business and Economics; IZA Institute of Labor Economics

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.

Keywords: Dunning–Kruger effect, overconfidence, judgment error, measurement error, instrumental variable

JEL Classification: D03, I23

Suggested Citation

Feld, Jan and Sauermann, Jan and de Grip, Andries, Estimating the Relationship between Skill and Overconfidence. IZA Discussion Paper No. 10611, Available at SSRN: https://ssrn.com/abstract=2940601 or http://dx.doi.org/10.2139/ssrn.2940601

Jan Feld (Contact Author)

Victoria University of Wellington - Te Herenga Waka - Victoria Business School ( email )

PO Box 600
Wellington 6140
New Zealand

HOME PAGE: http://www.victoria.ac.nz/sef/about/staff/jan-feld

Jan Sauermann

IFAU - Institute for Labour Market Policy Evaluation ( email )

Box 513
751 20 Uppsala
Sweden

SOFI, Stockholm University ( email )

Kyrkgatan 43B
SE-106 91 Stockholm
Sweden

IZA ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Maastricht University - Research Centre for Education and the Labour Market (ROA) ( email )

P.O. Box 616
Maastricht MD6200
Netherlands

Andries De Grip

Maastricht School of Business and Economics ( email )

P. O. Box 616
Maastricht, NL 6200 MD
Netherlands

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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