Overconfidence and Underconfidence: When and Why People Underestimate (and Overestimate) the Competition

Carnegie Mellon Tepper Working Paper No. 2003-E76

Posted: 31 Dec 2003

See all articles by Daylian M. Cain

Daylian M. Cain

Yale School of Management

Don A. Moore

University of California, Berkeley - Haas School of Business

Date Written: May 2006

Abstract

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

Cain, Daylian M. and Moore, Don A., Overconfidence and Underconfidence: When and Why People Underestimate (and Overestimate) the Competition (May 2006). Carnegie Mellon Tepper Working Paper No. 2003-E76, Available at SSRN: https://ssrn.com/abstract=441600 or http://dx.doi.org/10.2139/ssrn.441600

Daylian M. Cain

Yale School of Management ( email )

New Haven, CT 06520
United States
203 432 9441 (Phone)

HOME PAGE: http://mba.yale.edu/faculty/profiles/cain.shtml

Don A. Moore (Contact Author)

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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