Why do people remain overconfident even when objective information is available to correct their beliefs? This doctoral project uses a series of controlled experiments to identify when and why people update their beliefs optimistically, and uncovers a hidden economic cost of the resulting overconfidence.
The studies show that optimistic updating is more likely when uncertainty will not be resolved soon and when the underlying event is highly ego-relevant, and that overconfidence about one's own ability can distort effort decisions by triggering misguided inferences about the returns to effort.
Standard economic theory assumes that people update their beliefs like perfect Bayesian statisticians. Yet overconfidence — the tendency to overestimate one's abilities, knowledge, or chances of success — is pervasive and has been linked to costly decisions such as excessive market entry and poor managerial investment choices. This dissertation, based on three controlled experiments, asks why overconfidence evolves and persists despite the availability of corrective information, and identifies a previously overlooked economic consequence of holding overconfident beliefs.
The study “Motivated Beliefs and Anticipation of Uncertainty Resolution” (American Economic Review: Insights, 2022), shows in a laboratory experiment that participants update beliefs about their own rank optimistically when they do not expect their true rank to be revealed soon, but update neutrally when resolution is imminent — suggesting overconfidence thrives when people have time to enjoy holding positive self-views.
The study “Motivated Belief Updating and Rationalization of Information” (Management Science, 2024) shows that people update beliefs about an ego-relevant event (relative performance on an intelligence test) more optimistically when the event is made more important for their self-image, and that participants who receive bad news instead downplay how much the event matters to them — revealing two distinct self-serving strategies for protecting self-esteem.
The study “Misguided Effort”, a large-scale experiment in a simulated labor market shows that overconfidence has hidden indirect costs: when earnings depend jointly on personal ability and on the returns to effort, overconfident participants misattribute poor initial outcomes to low returns on effort and reduce their effort accordingly, while underconfident participants draw the opposite, equally misguided, inference.
Publication in peer-reviewed journal
Working paper
