Know Thyself: Competence and Self-awareness

Economic analysis of asymmetric information typically starts with the assumption that individuals know more about their own characteristics than outside observers. This assumption implies that individuals can accurately assess their own competence in a given domain. However, individuals can only judge their competence if they are sufficiently competent. Results from field experiments contradict predictions from economic theories that assume self-aware agents, but are consistent with predictions from theories that incorporate a positive correlation between competence and self-awareness in a given domain. This correlation explains some of the overconfidence observed among economic agents and implies a structure on decision errors that can be exploited to make novel predictions in important areas of economics. Copyright International Atlantic Economic Society 2010