Rationally Misplaced Confidence
University of Arizona Working Paper 18-05
39 Pages Posted: 13 Mar 2018 Last revised: 4 Dec 2018
Date Written: November 30, 2018
Abstract
I show that persistent underconfidence and overconfidence each arise from the combination of Bayesian learning about one's own abilities and rationally choosing to exert more effort when more confident. If an agent believes that greater effort reliably improves outcomes, then the agent learns away overconfidence faster than he learns away underconfidence. The agent becomes underconfident on average. In contrast, the agent becomes overconfident on average if he believes that greater effort increases his exposure to chance. The results are consistent with evidence that underconfidence and overconfidence are both widespread, and the mechanism is consistent with modern understanding of depression.
Keywords: learning, effort, confidence, ability, talent, explanatory style, depression, therapy
JEL Classification: D83, D90, G41
Suggested Citation: Suggested Citation
