Overconfidence in Probability Distributions: People Know They Don’t Know, but They Don’t Know What to Do About It

Jack B. Soll (), Asa B. Palley (), Joshua Klayman () and Don A. Moore ()
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Jack B. Soll: Fuqua School of Business, Duke University, Durham, North Carolina 27708
Asa B. Palley: Kelley School of Business, Indiana University, Bloomington, Indiana 47405
Joshua Klayman: The University of Chicago Booth School of Business, Chicago, Illinois 60637
Don A. Moore: Haas School of Business, University of California, Berkeley, California 94720

Management Science, 2024, vol. 70, issue 11, 7422-7442

Abstract: Overconfidence is pervasive in subjective probability distributions (SPDs). We develop new methods to analyze judgments that entail both a distribution of possible outcomes in a population (aleatory uncertainty) and imperfect knowledge about that distribution (epistemic uncertainty). In four experiments, we examine the extent to which subjective probability mass is concentrated in a small portion of the distribution versus spread across all possible outcomes. We find that although SPDs roughly match the concentration of the empirical, aleatory distributions, people’s judgments are consistently overconfident because they fail to spread out probability mass to account for their own epistemic uncertainty about the location and shape of the distribution. Although people are aware of this lack of knowledge, they do not appropriately incorporate it into their SPDs. Our results offer new insights into the causes of overconfidence and shed light on potential ways to address this fundamental bias.

Keywords: overconfidence; overprecision; subjective probability; epistemic uncertainty; aleatory uncertainty; probability judgment (search for similar items in EconPapers)
Date: 2024
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