Overconfidence effects are some of the most potent, pervasive and pernicious of any biases. It is blamed for wars, stock market bubbles, strikes, lawsuits, bankruptcy, failure of merges and acquisitions, high rates of entrepreneurial entries and other.
Overconfidence facilitates many of biases. We continue to believe that our judgements and believes are correct, despite copious evidence of fallibility. There are three basic types of overconfidence.
Three basic types
Over-precision is defined as human tendency to be sure judgements and decisions are accurate, uninterested in testing our assumptions and dismissive evidence that suggests we might be wrong. This leads us to draw narrow confidence intervals and to be too certain that we know the truth.
Over-estimation is our tendency to think that we are better, smarter, faster, more capable, more attractive, more popular (and so on) than we actually are. As a consequence, we overestimate how much we will accomplish in a limited amount of time or believe we have more control than we actually do.
Over-placement is peoples’ tendency to think we rank higher than others on certain dimensions, particularly in competitive contexts. This can lead people to be too interested in coppering with others in negotiations, markets and court.
Well-calibrated decision making
It can be good if optimism enhances psychological resilience and improves well being. Positive illusions enhance and protect our self-esteem, increase personal contentment and commitment, help us persist at difficult tasks and facilitate coping with aversive and uncontrollable events. Learned optimism is beneficial for mental and physical health.
However, positive illusions have negative impact on our learning, quality of decision making, responses to crises, conflict and discontent contributions. Sometimes we set objectives that has little chance of success. Individuals prevent learning from poor decisions blaming bad luck or other people.
Overconfidence can lead people to behave in ways that are arrogant, careless and self-centred. Being too sure that you’ll succeed can set you up for failure. Confidence can backfire if it turns out you were wrong. It can also undermine future performance. For instance: being confident in receiving good grades thus not studying.
Objectivity and credibility
People are constrained to some degree by the objectivity and credibility of overconfident beliefs and potential to disconfirm them. Sometimes it is hard to find evidence to confirm our beliefs thus we have the “right” to be more confident. For instance: people rate themselves to be environmentally friendly (which is hard to check). In contrast, then a more specific behaviour such as rates of recycling and reusing paper are checked, the numbers are much lower. It is more difficult to hold optimistic illusions that are inconsistent with easily available data.
Even though it is a difficult task, we should strive to be more well-calibrated. One way to do this is matching private beliefs to reality. We should learn to recognise positive illusions and aim to pursue better decision making.
Bazerman, M.H. and Moore, D.A., 1994. Judgment in managerial decision making (p. 226). New York: Wiley.