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The Nature of Our Overconfidence

Shakespeare, in his McBeth, puts it so eloquently: …”Vaulting ambition, which o’erleaps itself, and falls on th’other [side]“… Here he refers to a person with such ‘ambition’ to get on his horse that he jumps over his horse and falls on the other side. The ‘ambition’ in this case is a great metaphor for overconfidence.

Here is a quick test. Write down the two lengths for a business card where you would be 90% confident that the length will be within that chosen range. Now, if you got 9 cm (about 3.5 inches) you would have been right. However, if you were like most people, you would have been wrong. 

‘No evidence of disease’ are often interpreted as ‘Evidence of no disease’

Malcolm Gladwell (author of OultliersBlink) and Nassim Taleb (authour of  The Black Swan and Fooled by Randomness) have written extensively about people’s propensity to be overconfident and the effects it has on, for example, investors and their investment decisions. They attribute overconfidence to two things:
The first is that people tend to be not well calibrated. That is, they tend to be biased towards either being under- or overconfident. As Taleb notes: ‘No evidence of disease’ are often interpreted as ‘Evidence of no disease’. This makes us see only one side of the coin. Seeing only one side of a situations makes us think things are more likely (or unlikely) than they really are. This is what Taleb calls Silent Evidence. We do not know what we do not know!

Secondly, we have apparent positive illusions over situations. There are, in fact, three ‘types’: we inflate our assessments of our abilities, we have unrealistic optimism and have an illusion of what we think we have control over.
An interesting experiment is documented in Jonah Lehrer’s book  How We Decide about the fact that the more knowledge we have, the more (over)confident we become, but that we do not make better decisions with this additional information.

Before Magnetic Resonance Imaging (MRI) was introduced, doctors experienced major difficulties in determining the cause of patient  symptoms because the only ‘reliable’ tool they could use was X-rays. X-rays work because they, (obviously) transmit X-rays that penetrate soft tissue and bounce off ‘hard’ and calcified tissue (i.e. bones, organs etc.). MRI scans, on the other hand, work based on the amount of blood in an area (because  the magnets of the MRI picks up the increased oxygen to the brain). This produces images many times more detailed than X-rays.
Then, when patient started being diagnosed by means of the MRI scans, something strange happened. The number of successful diagnoses went DOWN! Naturally, we think: “but how is this possible?” The answer lies in how we perceive things. The more detailed information doctors were presented with (e.g. nerves, organs, veins, bone), the less they knew what was causing the pain, because there now were hundreds of things that could potential be wrong. BUT, their confidence level went UP…

More than 50% of people think they are above average when it comes to intelligence. However, given a large enough sample, any attribute should even out to its average (for the mathematically inclined, I refer you to the Law of Large Numbers).
The overconfidence effect is ubiquitous. Investors (especially those with more knowledge and information at their disposal) are prone to take risks they are not supposed to. Wars are frequently costing more and end up being a protracted affair largely as a result of overconfidence: British-led invasion of Gallipoli and the war in Iraq are just a few examples.

We also all think we are better drivers than we actually are, and this situation becomes worse when we are having a night out in town…
So what can we do to rid ourselves of this overconfidence? According to Jonah, nothing. But being aware of this ‘trait’ makes us see a situation in context, become conscious of the fact that we are experiencing overconfidence and then calibrate ourselves ‘back to reality’. Now that I mention it, it sounds so easy! Or am I being overconfident?…

 

Marketing Implications

“Only start paying in the third month!” is a commonly used example of a phrase by retailers (especially clothing stores and financial institutions). This is because people are more likely to say yes to rewards when the “pain” of paying is delayed (which sounds obvious, now that I think about it).
We think that with additional information we will be more likely to choose the better product, but this does not seem to be the case. What features or benefits take priority? There are many factors that influence this answer, and they differ from individual to individual and in context. This is, perhaps, what makes us overconfident. We have more information and choices, but we do not know how to prioritise this extra information.

Once we become aware of the fact that we value immediate gains and prefer delayed losses, we can at least stop and think about our next decision.

 

Further reading: Scientific American – Most People Say They Are Safe Drivers, Want New Auto-Assist Tech Anyway

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Werner van Zyl
Phone: +27 84 810 22 74
Fax: 086 604 8175
E-mail: werner@neuromind.co.za