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Why Overconfidence Is So Common and So Costly

It provides some important relative benefits.

Key points

  • Overconfidence is ubiquitous in negotiations, even though it often brings about joint losses.
  • One way to reconcile this conundrum is to consider whether an outcome is perceived in relative or absolute terms.
  • High levels of confidence lead negotiators to earn more than their partners, while lowering earnings for both.

One of the most widely documented biases in the social sciences is the fact that individuals typically overestimate their own abilities. For instance, people believe they are more attractive, smarter, and better drivers than they actually are.

What’s wrong with being (over)confident?

The persistence of overconfidence is a conundrum, as it usually brings about losses. This problem is particularly salient in negotiations: Overconfidence often prevents negotiators from reaching an agreement, resulting in lost opportunities for mutually beneficial solutions.

One way to reconcile this puzzle is to consider whether a contested outcome is perceived in relative or absolute terms. Indeed, while the costs of overconfidence tend to manifest in absolute terms (e.g., failure or injuries), the benefits emerge primarily in relative terms (e.g., status).

Standing united or falling divided

To test the idea that overconfidence persists because it provides relative benefits despite its absolute costs, my co-authors and I designed a study inspired by the TV game show Divided.

In the original game show, three contestants compete against each other by answering trivia questions. Answering correctly adds money to the final jackpot. At the end of the show, the prize money is divided into three unequal shares (roughly 60 percent, 30 percent, and 10 percent, respectively), and contestants have a hundred seconds to agree on how to allocate these shares between them. But with each passing second, all shares decrease proportionally such that if no agreement is reached within the given time, everyone goes home empty-handed. Using real data from the show, van Dolder and colleagues found that 19 percent of teams fail to reach an agreement, and about 50 percent of the total jackpot gets wasted (that comes to about 15,000 pounds per episode!).

The relative benefits of overconfidence

Our study leverages the structure of the original game show while adding a few features that allow us to measure the impact of contestants’ confidence on the outcome of the negotiation. In our study, pairs of participants must agree on how to allocate a prize resulting from their individual performance on a general knowledge test. As in the original game, the prize can only be allocated in unequal portions, and participants negotiate over who gets the larger share (70 percent of the total prizemoney).

To isolate the causal effect of confidence on negotiation outcomes, we added a stage before the negotiation in which participants receive information that suggests whether they are likely to have performed better or worse than their partner.

We then measured the share each participant received at the end of the negotiation relative to the initial prize money (absolute earnings), as well as the share each participant received relative to his or her partner (relative earnings). We found that high levels of confidence led people to earn more than their partners (a relative benefit) but also resulted in lower earnings for both partners (an absolute cost). We also found that about 15 percent of pairs failed to reach an agreement and that almost a quarter of the prize money was lost (i.e., about 7 euros). Interestingly, these numbers are not so far from what was observed in the original game show(!).

What we can learn from this study

Evolution typically selects for characteristics that yield relative success by increasing absolute performance (e.g., greater strength, speed, or intelligence). Thus, most desirable traits simultaneously facilitate relative and absolute performance, but some traits can create tension between the two.

The idea that individuals sometimes favor relative outcomes over absolute ones is not new; for example, romantic competition is rife with social comparison, as mating is a choice among alternatives. Evolution thereby ensures that individuals are highly attuned to their social status or with relative outcomes. Consistent with this possibility, a study by Gary Charness and colleagues found that people were willing to sacrifice their absolute outcomes to improve their ranking compared to others.

By considering relative and absolute outcomes simultaneously, our study shows that overconfident negotiators benefit over their partners even as they bring about joint losses, thereby providing an explanation for why overconfidence is both common and costly at the same time. Thus, overconfidence should be most likely to emerge whenever people prioritize relative over absolute gains, as in status competitions or among people who are particularly attuned to their relative standing.

References

Soldà, A., Ke, C., von Hippel, W., & Page, L. (2021). Absolute Versus Relative Success: Why Overconfidence Creates an Inefficient Equilibrium. Psychological Science, 32(10), 1662-1674.

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