Overconfidence, Self-deception,and Social Signaling

Gary Charness (UCSB)Aldo Rustichini (University of Minnesota)

Jeroen van de Ven (University of Amsterdam)

ICESOctober 2010

Motivation (1) Many studies in psychology and economics suggest that

people are overconfident in their ability (e.g., Svenson, 1981;Dunning et al., 1989) or the likelihood of success (e.g.,introspectively, researchers writing papers).

Evidence often comes from verbal statements by people onconfidence in their relative ability, but some studies also showevidence of overconfidence in choice behavior (e.g., Hoelzland Rustichini, 2005).

Burks et al. (2009) reject the notion that confidence judgmentsare consistent with Bayesian processing with common prior.

Motivation (2) This can be costly (e.g., Camerer and Lovallo, 1999;

Malmendier and Tate, 2008). Biased information processingseems to be at the core of overconfidence.

Psychologists have intensively studied self-serving beliefs;Baumeister, 1998 survey). People can maintain optimisticbeliefs by, e.g., recalling successes, forgetting failures,attributing success to self and failures to external sources, andstrategically acquiring information (Rabin and Schrag, 1999).

Why do this? Self-esteem consumption value? Instrumental?

Previous work Mobius et al. (2007) study how subjects respond to feedback

about their performance on an IQ test. They find that subjectsare conservative (not responding enough to new information)and asymmetric (reacting more to positive feedback thannegative feedback).

Ertac (2008) gives feedback in 2 different cases. Nosystematic bias in updating non-performance-related case, butsystematic bias in algebra/verbal test. One difference: type offeedback given. In her case, correct but incomplete, while wegive noisy feedback. This allows subjects to attributenegative feedback to external causes (noise), as psychologistswould predict.

Hypotheses and tests Statements of confidence are social signals, with first-order

awareness of social implications of self-confidence.Individuals may anticipate this and adjust signal accordingly.

We vary observability of signal and strategic implications ofobservation: self-confidence signals may/may not be observedby others, who may change actions depending on signal.

Social nature of signal of self-confidence may affectinformation processing, in particular probability conditioning.

We have two treatments where information processing isformally identical, but vary whether self-confidence involved.

Experimental design (1) Groups of 4 people (two labeled “A’, two “B”). Raven

Advanced Progressive Matrices IQ test, 15 questions.

We vary observability of signal and strategic implications ofobservation: self-confidence signals may/may not be observedby others, who may change actions depending on signal.

Social nature of signal of self-confidence may affectinformation processing, in particular probability conditioning.

We have two treatments where information processing isformally identical, but vary whether self-confidence involved.

Experimental design (2) Participants told they would be asked to evaluate their

performance later, that A’s and B’s would be matched, withpossibility for higher rank to earn 10 points.

After APM, told all subsequent steps in experiment. First,indicated confidence (0 to 100) of being in top 2 of group.

No one in T1 could see confidence of another. In T2 /T3, B’scould see confidence of A’s (common information).

In T1/2, 10 points to higher rank (A or B) and 0 to lower,random with tie. In T3, B’s chose whether to compete, withoutside option 3.5 (low) or 5.5 (high).

Experimental design (3) In T1 also sent report about whether in top 2 of their group or

not; told report was always correct if positive, but 50% chancewrong if negative. After report, asked if more likely whether intop 2 or not in top 2, for 10 points.

Also given isomorphic abstract scenario. Two machines; leftmakes 50% good rings and 50% bad rings, right makes onlygood rings. A mechanic takes a ring from 1 machine daily.People told % of days she went to left.

Then asked if more likely mechanic went to left, given goodring taken. Question asked 3 times, with varying %s. 10 pointsfor correct answer, 1 question randomly picked.

Experimental procedures

Sessions in Amsterdam,16-28 in each. Double-blind (SOPthere). Paid for 1 task chosen at random, 1 point = 1 euro.

17 sessions, 368 subjects; 7 of treatment 1 (N = 144), 3 oftreatment 2 (N = 68) and 7 of treatment 3 (3 with low outsideoption, N = 60, 4 with high, N = 96).

More sessions for T1 than others to get enough obs. in rangeof confidence levels 50 - 66.7. Sessions ended with aquestionnaire. 43% were female.

Results (1)Average # correct = 8.75. Average confidence 65.22.

Results (2)

Results (3)

Results (4)

A strategic social signal (1)? A could state overconfidence to discourage B from competing.

In fact, B enters the tournament in only 20% of cases when ownconfidence is lower than that reported by A; compares to 90% ofthe time when own confidence is higher. So potential deterrent.

A strategic social signal (2)? Do A’s indeed over-report? Male (but not female) A’s report 10

percentage points higher confidence in the strategic treatmentthan in the social and private treatment. Sensitivity of male A’sreported confidence to whether player B can respond to thissignal, suggests confidence is used as instrumental social signal.

Possible objection: no difference in male A’s confidence acrosslow/high outside option. If they correctly anticipate deterrenceeffect, should primarily find effect in T3 with high option, sincenearly all B’s (28 of 30) enter tournament with low option. But intypical environment B will respond to some extent; difficult forA to know parameter value determining how much B responds.

Another objection: male B’s also report higher confidence in thestrategic treatment. But perhaps automatic response to over-report in situations with strategic interaction, independent of role.

Equilibrium issues Is there an equilibrium in which A overstates confidence? A

sequential game with signaling. Natural language assumption ofmonotonicity, so there is a cutoff value.

Can prove that there is a natural equilibrium with inflatedconfidence levels; but we have not yet proven uniqueness.

Several people have the intuition that this is unique (apart fromthe perverse equilibrium with inverted signals.

More to come.

Summary People update well when their own rank is not an issue, but not

nearly as well with own performance. Self-esteem? Both self-defeating and self-serving errors, both more likely with lowerRaven score. The latter is a bit of a mystery.

In tournament, B’s enter much more (less) frequently when ownconfidence higher (lower) than A’s. But this is not fullyexploited. Males do show show a 10 percentage-point increasein stated confidence, perhaps reflecting instrumental socialsignaling.

Females enter tournament less frequently, but in line with lowerstated confidence.

Working on equilibrium issues.