Overconfidence is the tendency to over-estimate our own knowledge or abilities. Nobel Prize winning Psychologist Daniel Kahneman called overconfidence “the most significant of cognitive biases.”
Some examples of overconfidence:
- 60% of U.S. drivers surveyed put themselves in the top 20% of safety. 93% put themselves in the top 50% in terms of skill.
- 70% of students surveyed put themselves in the top 50% in leadership, 60% thought they had top 50% athletic ability and 85% thought they were in the top half in terms of getting along well of others. An amazing 25% put themselves in the top 1% in terms of their ability to get along with others.
- 95% of the faculty surveyed at University of Nebraska considered themselves above average in teaching ability. 68% considered themselves top quartile.
- 74% of the 300 professional fund managers surveyed believed they had delivered above-average job performance. The majority of the remaining 26% surveyed viewed themselves as average. (ALMOST 100% BELIEVED THEIR JOB PERFORMANCE WAS AVERAGE OR BETTER!)
- About half of investment advisors believe they are at the top of the industry, scoring themselves as 8,9 or 10 (on a scale of 1-10) for their success. Yet, only 21 percent believe their peers have achieved the same level of success.
Two interesting aspects of overconfidence is our own overconfidence and how it negatively affects our judgment and a second aspect is how we react to overconfident people. Both are discussed below.
Our Own Overconfidence
Are you overconfident? Most likely yes you are. According the Marshall School of Business at USC “when we are given factual questions and asked to judge the probability that our answers are correct, we tend to be far too optimistic.”
Here’s a test (below) that is very revealing. (Pull out a sheet of paper and mark your answers to keep yourself honest). Here’s how it works: give the low and high range of what you think the answers are to the below questions. Calibrate the range so that you are 90% certain your range will include the answer. For example, if the question was “How many light years away is the galaxy Andromeda from the Milky Way”, I might answer 500,000 light years and 50 million light years away. To say a range of one light year and 14 billion light years (the size of the visible universe) is beyond 90% and is cheating.
Click here for the answers to the above test. How many did you get wrong (meaning how many correct answers fell outside your range)? Most people miss 4-8. Not having your answers within your low and high range is a sign of overconfidence. We tend to think we know or can figure out the answer and then for some reason strive to show our knowledge by having too narrow of a confidence range.
Overconfidence is often problematic. It can amplify other judgmental biases as well as lead to poor decision-making. Overconfidence is blamed as a key factor in the Chernobyl accident, the Challenger explosion and the Deepwater Horizon oil spill, just to name a few. It can lead us to underestimate our health and driving risk and make poor decisions in those respects.
A great example of how overconfidence can get in the way of our judgments are studies that find that confidence is negatively correlated to our ability to judge and predict. As an example of this, in this very interesting study professional investors were pitted against undergraduate students. Each was asked to a pick stock from pairs of stocks taken from a list of 20 well known blue-chip companies. Participants were also given information about each of the stocks including past performance and analyst information. The goal was to pick the stock in each pair that would outperform the other stock. In addition to their stock picks, they were each asked how confident they were about their stock picks.
The results? The laypeople were quite confident about their ability to outperform, being on average 59% confident in their stock-picking abilities. The fund managers were even more confident, averaging 65% confidence. Interestingly, the students outperformed the professionals, picking an outperforming stock 49% of the time to the professionals’ 40% of the time. In fact, the more confident the professionals were, the worse they did.
We Love Overconfident People
The flip side of our own overconfidence is how we receive others who display overconfidence. Not surprisingly, we tend to believe individuals who seem more confident.
For example, research has shown that people prefer those who sound confident and are even willing to pay more for and/or excuse bad performance from confident (although inaccurate) advisors.
Some Reasons for the Overconfidence Bias
There are a few accepted reasons for the prevalence of overconfidence. First, we are driven to be overconfident because it confers psychological benefits, such as self-esteem, mental health and motivation.
Second, we are overconfident because we are flawed in judging ourselves as compared to others. We may not understand how good/bad others are compared to ourselves. We may even lack the competence to judge our own competence. Related IFOD on Ignorance and the Dunning-Kruger Effect.
Finally, we may be driven to overconfidence because there can be social and status benefits to being confident. Overconfidence is more common with those in positions of status or authority. Interestingly, research shows that overconfidence and status/authority is often a self-perpetuating feedback loop in that elevated status leads to overconfidence but that overconfidence is an attribute of those who attain higher status.
I am confident that your analysis of overconfidence is correct.