A Model of Overconfidence

25 Pages Posted: 21 Jul 2009

See all articles by Bruce A. Weinberg

Bruce A. Weinberg

Ohio State University (OSU) - Economics; IZA Institute of Labor Economics; National Bureau of Economic Research (NBER)

Abstract

People use information about their ability to choose tasks. If more challenging tasks provide more accurate information about ability, people who care about and who are risk averse over their perception of their own ability will choose tasks that are not sufficiently challenging. Overestimation of ability raises utility by deluding people into believing that they are more able than they are in fact. Moderate overestimation of ability and overestimation of the precision of initial information leads people to choose tasks that raise expected output, however extreme overconfidence leads people to undertake tasks that are excessively challenging. Consistent with our results, psychologists have found that moderate overconfidence is both pervasive and advantageous and that people maintain such beliefs by underweighting new information about their ability.

Keywords: overconfidence, behavioral economics, information processing

JEL Classification: D03, D08

Suggested Citation

Weinberg, Bruce A., A Model of Overconfidence. IZA Discussion Paper No. 4285, Available at SSRN: https://ssrn.com/abstract=1434619 or http://dx.doi.org/10.2139/ssrn.1434619

Bruce A. Weinberg (Contact Author)

Ohio State University (OSU) - Economics ( email )

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