Overconfidence Breeds Error

In one classic demonstration, clinical psychologists were asked to give confidence judgments on a personality profile. They were given a case report in four parts, based on an actual clinical case, and asked after each part to answer a series of questions about the patient’s personality, such as his behavioral patterns, interests, and typical reactions to life events. They were also asked to rate their confidence in their responses. With each section, background information about the case increased.

As the psychologists learned more, their confidence rose—but accuracy remained at a plateau. Indeed, all but two of the clinicians became overconfident (in other words, their confidence outweighed their accuracy), and while the mean level of confidence rose from 33 percent at the first stage to 53 percent by the last, the accuracy hovered at under 28 percent (where 20 percent was chance, given the question setup).

[...]

Overconfident individuals trust too much in their own ability, dismiss too easily the influences that they cannot control, and underestimate others—all of which leads to them doing much worse than they otherwise would, be it blundering in solving a crime or missing a diagnosis.

The sequence can be observed over and over, even outside of experimental settings, when real money, careers, and personal outcomes are at stake. Overconfident traders have been shown to perform worse than their less confident peers. They trade more and suffer lower returns. Overconfident CEOs have been shown to overvalue their companies and delay IPOs, with negative effects. They are also more likely to conduct mergers in general, and unfavorable mergers in particular. Overconfident managers have been shown to hurt their firms’ returns. And overconfident detectives have been shown to blemish their otherwise pristine record through an excess of self-congratulation.

The more a person knows about a subject, the more likely they are to make mistakes in judgement.