Overconfidence effect
The overconfidence effect is a well-documented cognitive bias in which a person's subjective confidence in their judgments is greater than the objective accuracy of those judgments. This phenomenon is prevalent across various domains of decision-making and has significant implications in both personal and professional settings.
How it works
The overconfidence effect occurs when individuals inflate their capabilities, knowledge, or control over events, often leading them to take unwarranted risks or make suboptimal decisions. Typically, this bias manifests in three main forms: overestimation of one's actual performance, overplacement of one's performance relative to others, and overprecision regarding the accuracy of one's beliefs.
Examples
- In finance, investors may exhibit overconfidence by believing they can pick stocks better than average, leading to excessive trading.
- In daily life, a person may overestimate their ability to drive safely while multitasking, such as texting.
- Professional forecasts, such as those by experts predicting economic trends, often display overconfidence, with predictions being far more certain than they should be.
Consequences
The overconfidence effect can lead to poor decision-making, risk-taking, and inefficient allocation of resources. In business, it might result in failed ventures or financial losses due to unrealistic projections. In personal life, it could lead to overcommitment or pursuing unattainable goals, potentially reducing overall well-being.
Counteracting
One can counteract overconfidence by seeking feedback, considering opposite viewpoints, and engaging in reflective thinking. Calibration training and performing 'premortems' on projects, where one anticipates potential failures, can also help mitigate this bias.
Critiques
Critics argue that measuring overconfidence reliably is difficult, as it varies greatly depending on the task and context. Some researchers suggest that what appears as overconfidence might actually be a rational strategy in environments where projecting confidence brings social or economic benefits.
Also known as
Relevant Research
Do those who know more also know more about how much they know? Organizational Behavior and Human Performance, 20(2), 159-183
Lichtenstein, S., & Fischhoff, B. (1977)
The trouble with overconfidence
Moore, D. A., & Healy, P. J. (2008)
Psychological Review, 115(2), 502-517
Prospect theory: An analysis of decision under risk
Kahneman, D., & Tversky, A. (1979)
Econometrica, 47(2), 263-291