Are We All Better Drivers than Average? Self-Perception and Biased Behaviour

Abstract

This Paper studies a model where individuals have imperfect self-knowledge and learning is costly. It shows that the endogenous decision to collect information before taking an action creates a systematic and testable bias in the aggregate behaviour of agents in the economy. More precisely, individuals distort the information acquisition procedure so as to favour the possibility of undertaking the action that generates the highest benefits in some states, even if it also generates the biggest losses in some others. The Paper thus explains within a rational framework why 80% of individuals may perceive themselves as being brighter, better drivers and more able entrepreneurs than their average peer. Applications to biases in career choices and judicial decisions are discussed.

Keywords: Self-perception, bias in judgement, decision-making

JEL Classification: A12, D83