Overconfidence in Probability Distributions: People Know They Don’t Know but They Don’t Know What to Do About It

35 Pages Posted: 14 Aug 2019

See all articles by Jack B. Soll

Jack B. Soll

Duke University - Management

Asa Palley

Indiana University - Kelley School of Business - Department of Operation & Decision Technologies

Joshua Klayman

University of Chicago - Booth School of Business

Don Moore

University of California, Berkeley - Haas School of Business

Date Written: March 13, 2019

Abstract

Quantifying uncertainty in the form of a probability distribution is a critical step in many managerial decision problems. However, a large body of previous work has documented pervasive overconfidence in subjective probability distributions (SPDs). We develop new methods to analyze judgments about variables which entail both epistemic and aleatory uncertainty and, in three experiments, study the quality of people’s SPDs in such settings. We find that although SPDs roughly match the aleatory concentration of the real-world distributions, people’s judgments are consistently overconfident because they fail to spread out probability mass to account for their own epistemic uncertainty about the location and other properties of the distribution. Although people are aware of this lack of knowledge, they do not know how to appropriately incorporate it into their SPDs. Our results offer new insights into the causes of overconfidence in real-world judgment domains and shed light on potential ways to address this fundamental bias.

Keywords: Overconfidence, Subjective Probability Distributions, Epistemic Uncertainty, Aleatory Uncertainty, Judgment Elicitation, Calibration

JEL Classification: D83, C53, C91

Suggested Citation

Soll, Jack B. and Palley, Asa and Klayman, Joshua and Moore, Don, Overconfidence in Probability Distributions: People Know They Don’t Know but They Don’t Know What to Do About It (March 13, 2019). Kelley School of Business Research Paper No. 19-46, Available at SSRN: https://ssrn.com/abstract=3435793 or http://dx.doi.org/10.2139/ssrn.3435793

Jack B. Soll (Contact Author)

Duke University - Management ( email )

Box 90120
Durham, NC 27708-0120
United States
(919) 660-7858 (Phone)

Asa Palley

Indiana University - Kelley School of Business - Department of Operation & Decision Technologies ( email )

Hodge Hall 4100
1275 E 10th St.
Bloomington, IN 47405
United States

Joshua Klayman

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Don Moore

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

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