Strategic Competition and Self-Confidence

57 Pages Posted: 14 Nov 2019 Last revised: 7 Dec 2019

See all articles by Stefanie Brilon

Stefanie Brilon

University of Marburg - School of Business & Economics

Simona Grassi

University of London - King's Business School

Manuel Grieder

ETH Zürich - Department of Humanities, Social and Political Sciences (GESS); Zurich University of Applied Sciences (ZHAW)

Jonathan Schulz

George Mason University; Harvard University

Date Written: October 29, 2019

Abstract

We test the hypothesis that strategic interactions foster overconfidence. We experimentally compare an environment where players have an incentive to overstate their own ability to deter competitors, with one where this incentive is removed. We find that overconfidence persists in the former environment but vanishes in the latter. The persistence of overconfidence in the strategic environment is driven by three mechanisms. First, players who win uncontested update their confidence as if they had won in actual competition. Second, in contrast, individuals who do not compete do not update their confidence, thus creating an asymmetry in updating. Third, inflated confidence signals of ability are “contagious” because they affect how their receivers update their confidence. We provide empirical evidence that these mechanisms can explain stylized facts on overconfidence such as the Dunning–Kruger effect. We also discuss implications for organizational design and management.

Keywords: Overconfidence, competition, strategic deterrence, self-deception, belief updating

JEL Classification: A12, C91, D83, D90, D91

Suggested Citation

Brilon, Stefanie and Grassi, Simona and Grieder, Manuel and Schulz, Jonathan, Strategic Competition and Self-Confidence (October 29, 2019). GMU Working Paper in Economics No. 19-40. Available at SSRN: https://ssrn.com/abstract=3481057 or http://dx.doi.org/10.2139/ssrn.3481057

Stefanie Brilon (Contact Author)

University of Marburg - School of Business & Economics ( email )

Universitätsstrasse 24
Marburg, D-35032
Germany

Simona Grassi

University of London - King's Business School ( email )

150 Stamford Street
London, SE1 9NH
United Kingdom

Manuel Grieder

ETH Zürich - Department of Humanities, Social and Political Sciences (GESS) ( email )

Chair of Economics
Clausiusstrasse 87
Zurich, 8093
Switzerland

Zurich University of Applied Sciences (ZHAW)

Center for Energy and the Environment
School of Management and Law
Winterthur, CH 8401
Switzerland

Jonathan Schulz

George Mason University ( email )

Fairfax, VA
United States

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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