Overconfidence is a Social Signaling Bias

Stephen Burks, Jeffrey Carpenter, Lorenz Götte () and Aldo Rustichini
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Lorenz Götte: National University of Singapore
Authors registered in the RePEc Author Service: Lorenz Goette

No 4840, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Evidence from psychology and economics indicates that many individuals overestimate their ability, both absolutely and relatively. We test three different theories about observed relative overconfidence. The first theory notes that simple statistical comparisons (for example, whether the fraction of individuals rating own skill above the median value is larger than half) are compatible (Benoît and Dubra, 2007) with a Bayesian model of updating from a common prior and truthful statements. We show that such model imposes testable restrictions on relative ability judgments, and we test the restrictions. Data on 1,016 individuals' relative ability judgments about two cognitive tests rejects the Bayesian model. The second theory suggests that self-image concerns asymmetrically affect the choice to get new information about one’s abilities, and this asymmetry produces overconfidence (K?szegi, 2006; Weinberg, 2006). We test an important specific prediction of these models: individuals with a higher belief will be less likely to search for further information about their skill, because this information might make this belief worse. Our data also reject this prediction. The third theory is that overconfidence is induced by the desire to send positive signals to others about one’s own skill; this suggests either a bias in judgment, strategic lying, or both. We provide evidence that personality traits strongly affect relative ability judgments in a pattern that is consistent with this third theory. Our results together suggest that overconfidence in statements is most likely to be induced by social concerns than by either of the other two factors.

Keywords: numeracy; overconfidence; Bayesian updating; self-image; social signaling; field experiment; IQ; personality; MPQ (search for similar items in EconPapers)
JEL-codes: C93 D03 D83 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2010-03
New Economics Papers: this item is included in nep-cbe, nep-evo, nep-exp, nep-hpe and nep-neu
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Citations: View citations in EconPapers (18)

Published - revised version published as 'Overconfidence and Social Signalling' in: Review of Economic Studies, 2013, 80 (3), 949-983

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