CeDEx workshop - Jonathan Schulz (University of Nottingham)

Strategic Overconfidence as a Self-Confirming Bias?

A large literature in psychology and economics finds that many individuals overstate their ability. To explain this finding we focus on strategic signalling: individuals have an incentive to overstate their ability to deter others. By deterring others successfully the inflated signals become a self-confirming bias. In our laboratory experiment we analyse over-confidence in a game of repeated two-player tournaments where one player endogenously decides to enter after receiving a signal from the other player. Consistent with previous research, we find that subjects strategically inflate their signals in order to deter their opponent. Furthermore, our repeated setup allows us to also analyse how overconfidence develops. We find that over time the inflation of signals increases. Further, a player who repeatedly manages to deter his opponents may overestimate his true ability, such that the inflated signal becomes a self-confirming belief. Preliminary evidence suggests that for males successful deterrence leads to a very similar update of true ability as actually winning a contest. This is not the case for females