The Psychology of Overconfidence
In everyday life, people frequently "bet" on their skills, whether they're choosing a career path, launching a new venture, or making a high-stakes business decision. These bets are often influenced by overconfidence, a cognitive bias that makes individuals overestimate their abilities or likelihood of success. While this phenomenon has been studied for decades, a recent paper by Cédric Gutierrez (Bocconi Department of Management and Technology), Mohammed Abdellaoui (HEC Paris), and Han Bleichrodt (University of Alicante) offers a fresh perspective. Their research, published in Management Science, explores the roles of interacting psychological drivers—optimistic beliefs and ambiguity attitudes—in shaping overconfident behavior.
This study provides a deeper understanding of the factors that drive overconfidence and shows how to disentangle these influences. The authors explain that overconfident behavior is not a monolithic concept but a product of two interconnected mechanisms: overly optimistic beliefs about one's abilities and attitudes toward ambiguity—the tendency to embrace or avoid ambiguity when making decisions. “Our findings emphasize that beliefs and ambiguity attitudes can either reinforce or counteract each other, profoundly influencing decision-making outcomes,” they write.
The interplay of beliefs and ambiguity
Overconfident behavior, as the authors argue, arises from two distinct psychological drivers. The first driver is optimistic beliefs, which lead people to overrate their own capabilities or believe that they are better than others, even without supporting evidence. The second is ambiguity attitudes, which determine how individuals respond to uncertainty. For instance, individuals with optimistic ambiguity attitudes are more likely to act enthusiastically on opportunities with unclear outcomes, perceiving potential where others see problems. Ambiguity attitudes can either amplify or mitigate optimistic or pessimistic beliefs, depending on the context.
Gutierrez and his colleagues designed a dual-method approach to study these dynamics. They separated the effects of beliefs and ambiguity attitudes by using two experimental methods: one that measured the combined impact of these factors and another that isolated the role of beliefs alone. This approach allowed them to uncover how these psychological drivers interact to produce nuanced patterns of overconfident behavior.
Experimental findings: beliefs, ambiguity, and task difficulty
In one experiment, participants were asked to bet on their performance—both their absolute score and their rank relative to others—on a moderately challenging ability test. The researchers found that ambiguity attitudes often offset pessimistic beliefs. While participants tended to undervalue their own performance when estimating their abilities, optimistic ambiguity attitudes counterbalanced this, resulting in decisions that were neither overconfident nor underconfident overall. The authors noted that this finding demonstrates the significant role of ambiguity in shaping how people assess their own abilities.
In a second experiment, the authors explored how task difficulty influences overconfidence. The results supported the well-documented “hard-easy effect”, which shows that confidence patterns shift with task complexity. Participants underestimated their absolute performance on easier tasks but believed they ranked higher than others (overplacement). On harder tasks, they overestimated their absolute performance but underestimated their relative rank (underplacement). Interestingly, ambiguity attitudes were consistently more optimistic in easier tasks, which exacerbated overplacement. On harder tasks, ambiguity attitudes played a lesser role, with beliefs taking precedence.
The researchers also observed that beliefs and ambiguity attitudes can interact in subtle ways. For example, when participants bet on their relative performance in easy tasks, their optimistic beliefs and ambiguity-seeking tendencies reinforced each other, resulting in strong overplacement. In contrast, when betting on absolute performance in easy tasks, pessimistic beliefs and optimistic ambiguity attitudes partially offset each other, tempering overconfident behavior.
Implications for decision-making
Overconfidence has long been linked to negative outcomes, such as entrepreneurial failure, poor strategic decisions, and suboptimal investments. By distinguishing between the effects of beliefs and ambiguity, this research provides insights into how overconfidence might be addressed in real-world settings. For example, interventions that aim to correct overconfident behavior must first identify its root cause. If overconfident behavior stems from optimistic beliefs, providing individuals with accurate feedback or statistical information about their performance may help. However, if ambiguity attitudes are the primary driver, interventions that focus on reframing ambiguous scenarios or reducing perceived uncertainty could prove more effective. “Organizations aiming to curb the harmful effects of overconfidence must tailor their strategies to the underlying cause, whether it's belief bias or ambiguity attitudes,” Cédric Gutierrez explains.
By isolating and measuring the components of overconfidence, Gutierrez and his colleagues have shed light on the interplay between beliefs and ambiguity in shaping human behavior, providing a richer understanding of how we make decisions in uncertain environments.
Ultimately, this research suggests that overconfidence is not just about thinking too highly of ourselves—it’s also about how we navigate the uncertainties that surround us. By addressing both elements, we can make more informed and balanced decisions, whether in the boardroom or in everyday life.
