Rationally Misplaced Confidence

University of Arizona Working Paper 18-05

47 Pages Posted: 13 Mar 2018 Last revised: 2 Jun 2019

See all articles by Derek Lemoine

Derek Lemoine

University of Arizona - Department of Economics

Date Written: May 30, 2019

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 imply that a principal can extract more effort from an agent by conditioning the precision of feedback on performance, and the mechanism is consistent with modern understanding of depression.

Keywords: learning, effort, confidence, ability, talent, performance appraisals, depression, therapy

JEL Classification: D83, D90, G41, L29

Suggested Citation

Lemoine, Derek, Rationally Misplaced Confidence (May 30, 2019). University of Arizona Working Paper 18-05. Available at SSRN: https://ssrn.com/abstract=3138936 or http://dx.doi.org/10.2139/ssrn.3138936

Derek Lemoine (Contact Author)

University of Arizona - Department of Economics ( email )

McClelland Hall
Tucson, AZ 85721-0108
United States

HOME PAGE: http://www.dereklemoine.com/

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