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

43 Pages Posted: 6 Apr 2009 Last revised: 8 Feb 2012

See all articles by Christoph Merkle

Christoph Merkle

Aarhus University

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: April 15, 2011

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.

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

JEL Classification: C90, G10

Suggested Citation

Merkle, Christoph and Weber, Martin, True Overconfidence: The Inability of Rational Information Processing to Account for Apparent Overconfidence (April 15, 2011). Organizational Behavior and Human Decision Processes, Vol. 116, No. 2, pp. 262-271, Available at SSRN: https://ssrn.com/abstract=1373675

Christoph Merkle (Contact Author)

Aarhus University ( email )

Nordre Ringgade 1
DK-8000 Aarhus C, 8000
Denmark

HOME PAGE: http://christophmerkle.github.io/

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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