How confident should you be?

Risk-averse people might say it pays to not be too confident. Others might feel being as realistic as possible makes sense.

Being overconfident can clearly be dangerous because you can get in way over your head (there is no such thing as a “pretty good” alligator wrestler.)

According to a paper by Bruce Weinberg at Ohio State, moderate overconfidence looks like the way to go.

It’s enough to push you to try new things and set your goals high:

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 own ability will choose tasks that are not sufficiently challenging. Overestimation of ability raises utility by deluding people into believing that they are more able than they are in fact. Moderate overestimation of ability and overestimation of the precision of initial information leads people to choose tasks that raise expected output, however extreme overconfidence leads people to undertake tasks that are excessively challenging. Consistent with our results, psychologists have found that moderate overconfidence is both pervasive and advantageous and that people maintain such beliefs by underweighting new information about their ability.

Source: “A Model of Overconfidence” from IZA Discussion Paper No. 4285, July 2009

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