this pattern of behavior was observed among all participants, it was most pronounced among the less-experienced undergraduate students. The experienced and inexperienced participants all displayed similar levels of accuracy in prediction, but the lessexperienced were substantially more confident in their answers, particularly in stage 4. Thus, the value of consulting experts might not be the diagnosis they provide. Rather, the true value of experts might just be their ability to recognize the inherent level of uncertainty displayed in the diagnosis they provide.

EXAMPLE 8.9 Better than Average

Many of us fancy ourselves to be rather good drivers. Just how good? Ola Svenson asked 161 participants in the United States and Sweden to rate their overall driving skill. Of the Swedes, roughly 69 percent believed they drove better than 50 percent of all drivers, and 93 percent of U.S. drivers believed they drove better than 50 percent of all drivers. Clearly people overestimate their own ability to drive. Similar results have been shown for a variety of other skills (for example, achievement on standardized tests or grade point averages). In a similar vein, Michael Ross and Fiore Sicoly interviewed dozens of married couples, asking each spouse individually to assess their percentage contribution to various household chores. Of 20 different activities, there were 16 in which the husband’s and wife’s contributions added to more than 100 percent. Thus, at least one member of the household was overestimating his or her contribution to the household as a whole. Similar results have been found in basketball teams or on class projects. People seem to take too much credit for their work and believe they perform it at a level that not many others can achieve.

Self-Serving Bias

In close connection with optimistic overconfidence, people tend to bias information in self-serving ways. Thus, one overestimates one’s ability to perform a specific task. One overestimates the importance of one’s contribution to specific tasks. Finally, one interprets ambiguous information in a way that exaggerates one’s value or worth. Such mistakes in judgment are collectively called self-serving bias. Such an effect appears to be pervasive in many various contexts. Psychologists have argued that a self-serving bias can be useful in helping someone to be self-assured and confident. However, such biases do not come without consequences. For example, those who wrongly believe that they are gifted in their ability to pick winners and losers on the stock market can end up paying the price for their bias. As well, people who inflate their previous

information is only valuable if the farmer can do something to respond to these whether conditions. Thus, learning that there would be little rain could be of use if it leads the farmer to invest in water conservation or reduce the investment in seed or fertilizer. Taking these actions allows the farmer to make a greater profit (or a smaller loss) given the conditions. Once all production input decisions are made and are irreversible, information is no longer valuable. Profits may be different if weather is good rather than bad, but if the farmer would not do anything to change her strategy in either state, the information does not increase expected profit. In this vein it is important to realize that misleading information does not always reduce the utility or profit of the information user. Watching and believing the reports from a news channel that skews all the news toward conservative views—even to the point of dishonesty—might not be damaging to the person’s utility if the person would have responded with the same actions (e.g., voting, political donations, or activism) anyway. It is only damaging if it persuades the person to action that would not be taken if more-accurate information had been absorbed.

Obviously this argument would also apply to erroneous beliefs such as overconfi- dence. Thus overconfidence does no damage to people if it does not change their actions. However, in the case of overconfidence a stronger statement can be made. In fact, many psychologists have found that there are substantial benefits to overconfidence in some circumstances. This can occur, for example, if being overconfident about one’s ability leads to a better or more-relaxed performance. For example, someone who is giving a presentation and who feels she is a poor speaker when underprepared and nervous might speak more haltingly or speak with less volume or emphasis. The person who feels she is a great public speaker may be able to perform better with the same level of preparation simply for lack of nerves. Oliver Compte and Andrew Postlewaite show that when performance depends on the level of confidence, overconfidence could actually improve utility or well-being. In this case, bad beliefs or information can improve well-being even if acted upon.

EXAMPLE 8.11 Self-Serving Bias and Negotiation Impasse

When modeling the negotiating process, economists typically assume that both parties face a significant cost if there is an impasse. For example, if labor negotiations fail, labor union members face significant loss of income in the course of a strike, and employers face significant losses in profits for either shutting down or using less-skilled replacements. Similarly, when a plaintiff sues a defendant, both face steep costs in court costs, and attorneys’ fees. Thus, it is usually in their best interest to seek an out-of-court settlement. If this is the case, why do any cases go to court? Why are labor strikes as common as they are?

Linda Babcock and George Loewenstein suggest that self-serving bias may be the answer to both of these questions. They conducted two studies to see if self-serving bias played a role in the breakdown of negotiations. In the first study, an experiment, participants were asked to read the evidence and proceedings of an actual court case resulting from a traffic accident in Texas. Participants were asked to estimate the award given by the judge in the case. After being assigned as either defendant or plaintiff, they

were then paired with another participant and asked to negotiate a settlement with a scaled-down pot of money, with the threat that the court-imposed settlement would prevail if they failed to reach an agreement and both sides would face additional costs. In a first condition, participants learned their role in the negotiations before they read the court proceedings. In this case, plaintiffs believed the settlement would be about $18,555 larger than those who were assigned as defendants, and close to 30 percent failed to negotiate a settlement. Alternatively, those who learned about their role only after reading the proceedings differed by only $6,936, and only 6 percent failed to reach a settlement.

The second study was a field study. All school district presidents and teachers’ union presidents in the state of Pennsylvania were surveyed. Both were asked to list school districts they considered comparable to their own for the purposes of salary negotiation. The responses displayed the hypothesized self-serving bias. The average salary for school districts listed by union presidents was $27,633. Alternatively, the average salary of school districts listed by the presidents of the school boards was $26,922. This is about a 2.4 percent difference between the two. The responses were then compared to the number and incidence of previous labor disputes. They found that a discrepancy of comparable income of $1,000 or more increases the probability of a strike by about 49 percent. Thus, teachers, students, and boards all feel the pinch of self-serving bias.

History and Notes

Sir Francis Bacon, in his 1620 treatise Novum Organum, laments that “The human understanding when it has once adopted an opinion . . . draws all things else to support and agree with it.” Thus he was the first to articulate confirmation bias four centuries ago. Further, his reasoning on logic illustrates a relatively sophisticated notion of confirmation bias and the need to avoid it in engaging in scientific inquiry. His work was subsequently built upon in the 1740s by the philosopher David Hume, who questioned entirely our ability to use inductive reasoning to generalize the results of a hypothesis test from one context to another. This debate has led to the somewhat rigid rules of scientific argument and testing now employed. Wason was the first to test for the psychological bias directly, finding substantial support for Bacon’s ancient assertion.

The modern notion of overconfidence was originally discovered by Stuart Oskamp when examining the accuracy of experienced and inexperienced psychologists in diagnosing or predicting behavior. His general result, that amateurs are about as accurate though more confident in their answers, has been generalized to many and various contexts, including economic forecasting.