True Overconfidence: The Inability of Rational Information Processing to Account for Apparent Overconfidence
43 Pages Posted: 6 Apr 2009 Last revised: 8 Feb 2012
Date Written: April 15, 2011
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.
Keywords: Overconfidence, Better-than-average effect, Overplacement, Bayesian updating, Belief distribution
JEL Classification: C90, G10
Suggested Citation: Suggested Citation