The Constructive Value of Overconfidence

Shapira-Ettinger Keren and Shapira Ron A.
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Shapira-Ettinger Keren: Bar Ilan University
Shapira Ron A.: Peres Academic Center, Israel

Review of Law & Economics, 2008, vol. 4, issue 3, 751-778

Abstract: The main argument of this paper is that overconfidence is underrated and can have constructive value in situations in which people tend to display a hyperbolic discounting of future utility. By artificially raising the estimation of future rewards, overconfidence can offset the inhibitory effects of exaggerated preference for present rewards, thus producing greater incentive, greater perseverance, resolute performance, and consequently higher achievements. Examples of this effect are situations of negotiation, improved recovery rates from serious disease, and situations of violent confrontation or war. Because overconfidence can lead to positive outcomes, there is at times an incentive to manipulate the facts perceived by the decision maker in order to build up confidence and increase the efficiency of the decision. These manipulations are a branch of the general theory of non-cooperative games with non-perfect information. We particularly draw attention to internal manipulations, such as selective memory, deliberate forgetfulness, and calculated inadvertence. In light of the constructive value of overconfidence, we regard these common mental practices as possibly rational and beneficial. It follows that under some circumstances, and in particular where the assumption of calculated risk should be encouraged and the chilling effect of over-deterrence should be eschewed, a systematically erroneous assessment of risk is a key to optimal behavior. Therefore, we criticize the common supposition that an overconfident person should be deemed negligent even if his overconfidence proves useful. We further object to the common view that an intended manipulation of memory necessarily entails recklessness. For similar reasons, we argue that the law of complicity should acknowledge friendship and love as countervailing the need to combat crime, inasmuch as friendship and love are instrumental to self-esteem.

Date: 2008
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DOI: 10.2202/1555-5879.1229

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