SSE/EFI Working Paper Series in Economics and Finance
No 535:
Confidence Interval Estimation Tasks and the Economics of Overconfidence
David Cesarini ()
, Örjan Sandewall ()
and Magnus Johannesson ()
Abstract: Experiments in psychology, where subjects estimate
confidence intervals to a series of factual questions, have shown that
individuals report far too narrow intervals. This has been interpreted as
evidence of overconfidence in the preciseness of knowledge, a potentially
serious violation of the rationality assumption in economics. Following
these results a growing literature in economics has incorporated
overconfidence in models of, for instance, financial markets. In this paper
we investigate the robustness of results from confidence interval
estimation tasks with respect to a number of manipulations: frequency
assessments, peer frequency assessments, iteration, and monetary
incentives. Our results suggest that a large share of the overconfidence in
interval estimation tasks is an artifact of the response format. Using
frequencies and monetary incentives reduces the measured overconfidence in
the confidence interval method by about 65%. The results are consistent
with the notion that subjects have a deep aversion to setting broad
confidence intervals, a reluctance that we attribute to a socially rational
trade-off between informativeness and accuracy.
Keywords: overconfidence; uncertainty; monetary incentives; experiments; (follow links to similar papers)
JEL-Codes: C91; D80; Z13; (follow links to similar papers)
35 pages, September 22, 2003
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