Overconfidence and Underconfidence: When and Why People Underestimate (and Overestimate) the Competition
Carnegie Mellon Tepper Working Paper No. 2003-E76
Posted: 31 Dec 2003
Date Written: May 2006
It is commonly held that, especially for outcomes under their control, people believe themselves to be better than others. However, such overconfidence is not universal. This paper presents evidence showing that people believe that they are below average on skill-based tasks that are difficult. A simple Bayesian explanation can account for these effects and for their robustness: On skill-based tasks, people generally have better information about themselves than about others, so their beliefs about others' performances tend to be less extreme than their beliefs about their own performances. This explanation is tested in two experiments that examine these effects' robustness to experience, feedback, and market forces. The discussion explores the implications for strategic planning in general and entrepreneurial entry in particular.
Keywords: Entrepreneurship, Comparative judgment, Overconfidence, Above average
JEL Classification: C91, L11, M13, D84
Suggested Citation: Suggested Citation