What is Overconfidence?

what is overconfidence

Are you sure you are going to come out on top in the upcoming business negotiations, though you have just joined the bargaining team? Be careful, you may be suffering from overconfidence.  According to Merriam-Webster.com, overconfidence is:
“The quality of being overconfident; excessive confidence.”   

Overconfident, in turn, is defined as: 
“excessively or unjustifiably confident: having too much confidence (as in one’s abilities or judgment) an overconfident driver. I wasn’t overconfident about their chances of winning.”

These seem like straightforward concepts, but perhaps because they are widespread and can have serious consequences, they have generated a fair amount of psychological and behavioral economic research.  Psychologists have identified a cognitive bias called the overconfidence bias, or sometimes the overconfidence effect. 

A cognitive bias is an erroneous thought process caused by the human brain’s tendency to simplify information processing using assumptions. This thought simplification process is a coping mechanism to help the brain process large amounts of information quickly.  The errors known as cognitive biases are essentially bad shortcuts in our thinking.

The overconfidence bias happens when one’s confidence in themselves routinely exceeds their actual performance.

Two other cognitive biases contribute to the overconfidence bias. The first is confirmation bias, a term that refers to the tendency to search for, interpret, prefer, and remember information in a way that supports one’s prior beliefs.  Of course, this may occur consciously, but the term generally refers to an unconscious process.  The bias will cause us to forget or minimize contrary evidence, persuasive arguments, and even prior conflicting experiences.  

The second cognitive bias supporting the overconfidence effect is the hindsight bias, the habit of looking back on an occurrence that we could not have predicted and thinking that the outcome was easily predictable and that we had already known it. It is also called the ‘knew-it-all-along’ effect. This bias may cause the subject to misremember history and make it difficult to learn from the experience.  But it will reinforce overprecision bias (a form of overconfidence bias discussed below) by contributing to the self-perception that one’s predictions are always, or nearly always, right.

The three types of overconfidence bias

Overconfidence is not a unitary concept. Research centers on three distinct types: 

  1. overestimation, or mistaken optimism about one’s performance;
  2. over-placement, or judging one’s ranking in a group to be higher than it is; and
  3. overprecision, or excessive certainty in the accuracy of one’s beliefs. Griffin and Tversky identify what they call the “positive illusion,” which is simply over-optimism, the unsupported belief that things will turn out well.

Examples of overconfidence 

Examples can help us understand the real impact of the overconfidence bias. Overestimation makes us believe we can do work faster and cheaper than is possible. It also causes us to underestimate the impact of random chance and factors beyond our control that add to time and cost. Overestimation is particularly prevalent in long-term, complex projects. The Sydney opera house was expected by its architects to take four years and cost $7 million to build.  Instead, it took 14 years and cost $102 million.  

Overplacement is ranking one too high in a group.  Research by the American Automobile Association provided a startling example of over-placement.

A whopping 73% of Americans consider themselves to be better-than-average drivers. By definition, a mean average is a point at which 50% of the sample is above and 50% of the sample is below. Therefore, 23% of the respondents to the survey were incorrect. 

Overprecision is unfounded faith in one’s accuracy. Casino gambling is a perfect example of overprecision. Faith in their (often baseless) predictions makes bettors assume that they can accurately forecast the next turn of the cards or spin of a roulette wheel. Because of the overprecision bias, people often end up losing more than they can afford in gambling.  Such overprecision affects the stock market, real estate, and corporate acquisitions. Worse yet, it causes investors to neglect research and analysis, trusting in their perceived ability to discern the truth.    

Overconfidence can have serious consequences 

Overconfidence is dangerous, disruptive, disastrous, and even deadly.  Business owners and investors who fall into the overconfidence trap face serious losses and even bankruptcy.  Professionals who are overconfident risk violations of their duties of due care and competence if they skip important safeguards, relying instead on the feelings of infallibility created by their cognitive biases. Overconfident (meaning affected by the overconfidence bias) lawyers may land clients in prison or with unnecessarily lost cases.  A 2010 Research paper by Elizabeth Loftus and international colleagues found that overconfidence bias caused attorneys to fail at one of the most basic functions lawyers perform:  predicting the success or failure of a case at trial.  The results covered both criminal and civil cases and found the lawyers in the study were overconfident 48% of the time.      

The ability to predict success or failure is important in answering several vital questions: Should the case be taken at all? Should the case be taken to trial? Should settlement offers be made or accepted? On what terms? Likewise, what position should be taken on plea-bargaining given the likelihood of a guilty verdict adding the probable sentence? An attorney who cannot accurately answer these questions leaves the client at a significant disadvantage.  Nor are the answers to these questions static. They change as the case changes. There is some suggestion in the literature that lawyers suffering from confirmation bias cannot adjust to the reality of a case that goes downhill as a result of the discovery. Once again, this makes an accurate decision about whether to settle and on what terms, is impossible.

Lawyers are not the only professionals who suffer from overconfidence bias. Physicians who are overconfident in a diagnosis do not look for alternative diagnoses or perform advisable tests.  Unfortunately, 10% to 15% of diagnoses are mistaken.  It is estimated that 75% of this number is the result of cognitive biases such as overconfidence.  Add to this patient’s dislike of care provider uncertainty, and a time-pressured environment like the emergency department and errors multiply. How should medical personnel respond?

One way is to explicitly attack cognitive biases.  Actively look for data that counters your diagnosis. Consider alternatives. Consult with your peers; be sure to listen to them.  Disparate viewpoints trigger different thought patterns.  Finally, ask yourself about the consequences of misdiagnosis.  More severe possible outcomes justify a more careful examination.

When engineers fall prey to overconfidence bias, years’ worth of work, billions of dollars, and lives can all be lost in moments. The Challenger space shuttle disaster is an example. On the evening before the scheduled launch in January of 1986, Morton Thiokol engineers refused to sign off on the launch over concerns that rubber O-ring seals would not prevent fuel leaks in the cold temperatures of launch day, colder than any launch before.  But the launch had already been delayed twice. NASA wanted to go. They could handle whatever came up.  Its overconfidence was built on 25 years of perfect safety, and the nearly miraculous recovery of Apollo 13 from space after a mid-mission explosion. Its mission staff were experts. In the end, everyone agreed to launch, under intense pressure. Morton’s engineers were asked to prove that the O-ring would fail.  They couldn’t do that because no launch had been this cold. They were given no time to experiment.  They gave in and disaster followed.

NASA had the same opportunity as the doctors in our medical example.  It had evidence that was contrary to its desired theory. That evidence was ignored. It had peers arguing for caution; It didn’t listen. It had an almost – certainly fatal result if it were wrong.  But it was not cautious. Its overconfidence bias took over.

One of the most common areas where people experience overconfidence bias is finance. Small investors often believe they have more knowledge and insight into markets than they do. They may also believe they have control of things that are either random or in another’s control. For example, they may think they know what the market is going to do until it takes an unexpected turn. This happens to sophisticated corporate investors as well as individuals.  

GGP Inc. is a publicly held American commercial property company. In 2009, it filed the biggest real estate bankruptcy in American history.  GGP owned more than 200 malls and numerous office buildings at its peak in 2007, and its stock was trading well. It was heavily leveraged, but at that point could have used excess cash to reduce debt. Instead, it decided to continue borrowing and buying property rapidly. To maximize profit, it borrowed relatively short term and had to refinance often. When things were going well that wasn’t a problem.  It also held a large amount of commercial mortgage-backed securities. When the real estate crisis began, its management was convinced that the problem would be short-lived. 

The business was heavily burdened with debts by 2008, with a sizable portion of that debt due soon. But despite opportunities, the company declined to sell assets to raise cash, though it had several opportunities. It simply continued to borrow.

The company faced difficulty with even routine refinancing of debt following the collapse of the market for commercial mortgage-backed securities. As a result, its shares plummeted, and the business declared bankruptcy. The corporation had missed several chances to sell assets and avoid default because of overconfidence bias.  

Dealing with overconfidence

The bad news is that everyone will have to deal with overconfidence.  It is hardwired into our brains.  The good news is that there are things we can do to counteract it.  In addition to the strategies already discussed, others can help with the specific types of overconfidence you are facing.  

If you are dealing with overestimation, psychologists recommend that you break down, or “unpack,” the task into its component parts, and decide on the time and money needs for each part.  We underestimate because we think of a project as one thing.  But it often has many steps. Consider each one. It’s also a good idea to build extra time and money into your estimate.  Everything will not go according to plan. Things will be delayed, equipment will break, and interruptions will occur. Plan on it. Not everything is under your control.

Dealing with over placement

It’s nice to see ourselves as better than other people.   But if we are not, we may be in for a rude awakening later.  We also may take tasks on ourselves that are better done by others.

Instead of using your own opinion about your relative ranking, try to use objective criteria like experience, education, training, proven ability, and so on.  Play devil’s advocate. Why would you be someone else better than you? If you are brave enough, ask other people which of you would do better at a given task.  Take honest feedback to heart.

Dealing with overprecision  

As discussed above, overprecision is an unfounded belief in the accuracy of your statements. There are things you can do to become more accurate. First, avoid generalities like “I am a great driver.” How are you a great driver? Do you speed? Do you always come to a full stop? How do you treat other drivers?  If you are objective, you will end up with a more accurate picture of your driving.  

Try to think probabilistically. Instead of taking one number as an outcome, think about the probability of various outcomes occurring. You are spending more time analyzing the situation and are likely to come out with a better understanding. 

We won’t be able to eliminate the overconfidence bias, but if we try, we can limit its effects on us.


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