Tag Archives: Overconfidence

We are more overconfident on tasks we don’t actually expect to perform, and when we don’t expect to have to explain our evaluation to others.  On expecting to perform:

Participants made predictions about performance on tasks that they did or did not expect to complete.  In three experiments, participants in task-unexpected conditions were unrealistically optimistic: They overestimated how well they would perform, often by a large margin, and their predictions were not correlated with their performance. By contrast, participants assigned to task-expected conditions made predictions that were not only less optimistic but strikingly accurate. Consistent with predictions from construal level theory, data from a fourth experiment suggest that it is the uncertainty associated with hypothetical tasks, and not a lack of cognitive processing, that frees people to make optimistic prediction errors.  Unrealistic optimism, when it occurs, may be truly unrealistic; however, it may be less ubiquitous than has been previously suggested.

On expecting to explain: 

Accountability … [is] the expectation to explain, justify, and defend one’s self-evaluations (grades on an essay) to another person ("audience"). Experiment 1 showed that accountability curtails self-enhancement. Experiment 2 ruled out audience concreteness and status as explanations for this effect. Experiment 3 demonstrated that accountability-induced self-enhancement reduction is due to identifiability. Experiment 4 documented that identifiability decreases self-enhancement because of evaluation expectancy and an accompanying focus on one’s weaknesses.

It is almost as if we at some level realize that our overconfidence is unrealistic.

Consider choices like:

• Do I push folks at my large company to hire my son?
• Do I spend college money from my parents to pursue an acting career?
• Do cut open this patient to try my new surgical technique?

Such choices might be justified if, for example,

• My son is really good fit for the job opening.
• I have an excellent chance to succeed in acting.
• This is a very promising surgical technique.

But when am I justified in having such beliefs?  Most people think they are justified in acting on a belief if that belief is "sincere."  And by "sincere" they mean they are not conscious of just pretending to believe.  When they go to the shelf in their mind where that belief is suppose to sit, this is what they find.  And they don’t remember anything illicit about how that belief got there.

But sincerity is way too low a standard!  Since humans have an enormous tendency toward self-deception, wishful thinking, and so on, we are clearly "sincerely" biased in many ways.  So to be justified in acting on a belief, you must have tried to identify and overcome relevant biases.  Furthermore, your efforts should be proportionate to the magnitude of the actions being considered, and to the magnitude of the biases that could distort your beliefs.  For important actions where biases tend to be large, you must try very hard to consider what you might have seen and felt if the world were other than you think it is. 

A recent NBER paper:

We test whether top corporate executives are miscalibrated, and whether their miscalibration impacts investment behavior. Over six years, we collect a unique panel of nearly 7,000 observations of probability distributions provided by top financial executives regarding the stock market. Financial executives are miscalibrated: realized market returns are within the executives’ 80% confidence intervals only 38% of the time. We show that companies with overconfident CFOs use lower discount rates to value cash flows, and that they invest more, use more debt, are less likely to pay dividends, are more likely to repurchase shares, and they use proportionally more long-term, as opposed to short-term, debt.

It would be relatively easy to measure overconfidence in CFO candidates, and choose less overconfident ones.  Since this doesn’t happen, I suspect that CEOs, like bosses of software managers, prefer overconfident CFOs.

This entry by Eliezer struck me as an example of what I call the fallacy of the one-sided bet.  As a researcher and teacher in decision analysis, I’ve noticed that this form of argument has a lot of appeal as a source of paradoxes.  The key error is the framing of a situation as a no-lose (or no-win) scenario, formulating the problem in such a way so that tradeoffs are not apparent.  Some examples:

Continue reading "The fallacy of the one-sided bet (for example, risk, God, torture, and lottery tickets)" »