Overconfidence and social signalling

Stephen V. Burks, Jeffrey P. Carpenter, Lorenz Goette, Aldo Rustichini

Research output: Contribution to journalArticlepeer-review

48 Scopus citations

Abstract

Evidence from both psychology and economics indicates that individuals give statements that appear to overestimate their ability compared to that of others. We test three theories that predict such relative overconfidence. The first theory argues that overconfidence can be generated by Bayesian updating from a common prior and truthful statements if individuals do not know their true type. The second theory suggests that self-image concerns asymmetrically affect the choice to receive new information about one's abilities, and this asymmetry can produce overconfidence. 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 judgement, strategic lying, or both. We formulate this theory precisely. Using a large data set of relative ability judgements about two cognitive tests, we reject the restrictions imposed by the Bayesian model and also reject a key prediction of the self-image models that individuals with optimistic beliefs will be less likely to search for further information about their skill because this information might shatter their self-image. We provide evidence that personality traits strongly affect relative ability judgements in a pattern that is consistent with the third theory of social signalling. Our results together suggest that overconfidence in statements is more likely to be induced by social concerns than by either of the other two factors.

Original languageEnglish (US)
Pages (from-to)949-983
Number of pages35
JournalReview of Economic Studies
Volume80
Issue number3
DOIs
StatePublished - Jul 2013

Bibliographical note

Funding Information:
Acknowledgments. The authors (who are listed alphabetically) gratefully acknowledge generous financial support for the Truckers and Turnover Project from the John D. and Catherine T. MacArthur Foundation’s Research Network

Funding Information:
on the Nature and Origin of Preferences, the Alfred P. Sloan Foundation, the Trucking Industry Program at the Georgia Institute of Technology, the University of Minnesota, Morris, and the Federal Reserve Bank of Boston, and both financial and in-kind support from the cooperating motor carrier, its staff, and its executives. The views expressed are those of the authors, and do not necessarily reflect the views of any of their employers or of the project’s funders. Carpenter and Rustichini also thank the NSF (grants SES-0617778 and SES-0924896, respectively).

Keywords

  • Bayesian updating
  • Confidence
  • Personality traits

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