The Evolution of Overconfidence

Abstract (Via Arxiv)

Confidence is an essential ingredient of success in a wide range of domains including job performance, mental health, sports, business, and combat. Many authors have suggested that overconfidence–defined here as believing you are better than you are in reality–is advantageous because it serves to increase ambition, resolve, morale, persistence, and/or the bluffing of opponents. However, too much overconfidence can cause arrogance, market bubbles, financial collapses, policy failures, disasters, and wars, so it remains a puzzle how such a false belief could evolve or remain stable in a population of competing accurate beliefs. Here, we present an evolutionary model that shows overconfidence actually maximizes individual fitness and populations will tend to become overconfident, as long as the resources at stake during conflicts exceed twice the cost of competition. This is because overconfident individuals make more challenges when there is uncertainty about the strength of opponents (and thus the outcome of conflicts), while less confident individuals shy away from many conflicts they would win. Where the value of a prize is at least twice the cost of trying, overconfidence is the best strategy. The model suggests that the conditions under which humans would have evolved to have a “rational” unbiased view of their own capabilities are exceedingly rare, and it helps to explain why resource-rich environments can paradoxically create more conflict. Moreover, the fact that overconfident populations are evolutionarily stable may be one reason why overconfidence persists today in politics, business, and finance, even if it causes occasional disasters.

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30. September 2009 by Miguel Barbosa
Categories: Behavioral Economics, Curated Readings | Leave a comment

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