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Absolute Versus Relative Success : Why Overconfidence Creates an Inefficient Equilibrium

Author

Listed:
  • Alice Soldà

    (Universität Heidelberg [Heidelberg] = Heidelberg University)

  • Changxia Ke

    (QUT - Queensland University of Technology [Brisbane])

  • William von Hippel

    (UQ [All campuses : Brisbane, Dutton Park Gatton, Herston, St Lucia and other locations] - The University of Queensland)

  • Lionel Page

    (UTS - University of Technology Sydney)

Abstract

Overconfidence is one of the most ubiquitous biases in the social sciences, but the evidence regarding its overall costs and benefits is mixed. To test the possibility that overconfidence might yield important relative benefits that offset its absolute costs, we conducted an experiment ( N = 298 university students) in which pairs of participants bargained over the unequal allocation of a prize that was earned through a joint effort. We manipulated confidence using a binary noisy signal to investigate the causal effect of negotiators' beliefs about their relative contribution to the outcome of the negotiation. Our results provide evidence that high levels of confidence lead to relative benefits (how much one earns compared with one's partner) but absolute costs (how much money one receives overall). These results suggest that overconfidence creates an inefficient equilibrium whereby overconfident negotiators benefit over their partners even as they bring about joint losses.

Suggested Citation

  • Alice Soldà & Changxia Ke & William von Hippel & Lionel Page, 2021. "Absolute Versus Relative Success : Why Overconfidence Creates an Inefficient Equilibrium," Post-Print hal-04850419, HAL.
    • Handle: RePEc:hal:journl:hal-04850419
    DOI: 10.1177/09567976211007414
    Note: View the original document on HAL open archive server: https://hal.science/hal-04850419v1
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    References listed on IDEAS

    as
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