A MODEL OF OVERCONFIDENCE

Authors

  • Bruce A. Weinberg

    Corresponding author
    1. Ohio State University
      *Department of Economics, Ohio State University, 1945 North High Street, Columbus, OH 43210-1172, USA. E-mail: weinberg.27@osu.edu. The author is grateful for comments from Eric Fisher, Amy Glass, Masanori Hashimoto, David Hirshleifer, Peter Howitt, Carolyn Moehling, Howard Marvel, Jim Peck, Sherwin Rosen, David Schmeidler and seminar participants at Ohio State University. The author is responsible for all errors.
    Search for more papers by this author

*Department of Economics, Ohio State University, 1945 North High Street, Columbus, OH 43210-1172, USA. E-mail: weinberg.27@osu.edu. The author is grateful for comments from Eric Fisher, Amy Glass, Masanori Hashimoto, David Hirshleifer, Peter Howitt, Carolyn Moehling, Howard Marvel, Jim Peck, Sherwin Rosen, David Schmeidler and seminar participants at Ohio State University. The author is responsible for all errors.

Abstract

People use information about their ability to choose tasks. If more challenging tasks provide more accurate information about ability, people who care about and who are risk averse over their perception of their ability will choose tasks that are not sufficiently challenging. Moderate overestimation of ability and overestimation of the precision of initial information leads people to choose tasks that raise expected output (and utility); however, extreme overconfidence leads people to undertake tasks that are excessively challenging. Consistent with our results, psychologists find that moderate overconfidence is both pervasive and advantageous.

Ancillary