Overconfidence in your decisions
(Part 1)

Overconfidence is a powerful source of illusions, primarily determined by the quality and coherence of the story that you can construct, not by its validity.
Daniel Kahneman

Previously, we published a series of articles about psychological anchors and their effect on our decisions. We have also talked to you about the illusion of control. This time we are going to write about another matter that will help you judge its importance: the tendency of all human beings to overconfidence, mainly in their own beliefs.

What does this mean? People are willing to act influenced by stories or motives they trust blindly… but they shouldn’t.

This article arises from Behavioral Economics and to give it the rigor of Psychology, in Steering Bird, online advisers in business direction, management and finance, we have worked together with Tu Mejor Tú, metas clatas para el éxito.

Introduction

Overconfidence is the most dangerous form of carelessness.
Star Wars: The Clone Wars

Most people think they know more than they really do. Most people like to express their opinion on any subject, regardless of whether they know it or not, and they often act on what they think. Many people are aware that they know and trust it. Others think they know something, even though they are not aware of their ignorance. Still, everyone trusts their own beliefs and makes quick decisions based on this.

We think that more than once you have verified the existence of a know-it-all. They abound in the world. It is not a perception only ours or yours. Psychology has been in charge of studying this tendency to overconfidence.

How often do you go wrong when you think you are sure of something?

Well, I think we tried very hard not to be overconfident, because when you get overconfident, that’s when something snaps up and bites you.
Neil Armstrong

Think about the following: Usually when you answer something, do you think your answer is correct?

All the exams of your stage as a student, plus all the reports in your work stage are examples of this. You usually answer if you know… or if you think you know, right? Yes, people tend to believe that they are right. Let’s change the meaning of the question. How often do people make mistakes when they are sure of getting an answer right?

Regarding this, the psychologists Baruch Fischhoff, Paul Slovic and Sarah Lichtenstein, published in the Journal of experimental psychology: Human Perception and Performance, the study Knowing with Certainy: The Appropriateness of Extreme Confidence (1977). In this study, carried out through five experiments, they showed the following. When someone is asked general questions and then asked to evaluate the probability that their answer is correct, they tend to overestimate the probability of being correct. For example, when study subjects indicated that they were sure they were right, they were only right 80% of the time.

There is no consensus on this result. However, based on the study of Fischhoff, Slovic and Lichtenstein, plus empirical observation, it leads us to think that overconfidence seems to be a basic condition of the human being. All people seem to have opinions based on “solid” arguments and are quick to make judgments. It is a matter of watching any debate program on television (be it politics, sports or any subject), all participants seem to be right about their own arguments (beyond the intrinsic component of show business). Perhaps this trait comes from our most basic biology, when we were hunter-gatherer primates and had to make decisions quickly to survive.

Why do people seem so sure of themselves?

People will always prefer black-and-white over shades of grey, and so there will always be the temptation to hold overly-simplified beliefs and to hold them with excessive confidence.
Thomas Gilovich

This is a question that has occupied psychology for quite some time, throwing up some interesting theories.

First, people generate probability judgments based on known opinions. Thus, they leave out of their analysis many other options that would allow them to make comparisons and generate better judgments. This is what Allan Collins, Eleanor Warnock, Nelleke Acello and Mark Miller indicate in the study “Reasoning from uncomplete knowledge”, which appears in the book “Representation and Understanting: Studies in Cognitive Sciences” (1975) by Daniel Bobrow and Allan Collins.

Furthermore, people tend to evaluate the probability of accuracy of their conclusions only in the last step of the reasoning process. In this way, they ignore any other factor that could lead them to error, both in the last step and in any previous one. This is pointed out by Gerd Gigerenzer in “How to make a cognitive illusion disappear: Beyond Heuristic and biases”, published in European Review of Social Psychology (1991)

People’s overconfidence could have a retrospective bias, this is the tendency of people to think that they should know that something would happen before it happened, that they should have been present or more attentive to situations. This is indicated by Dagmar Strahlberg and Anne Maass in “Hindsight bias: impaired memory or biased reconstruction” published in European Review of Social prychology (1998)

So far, we have talked  to you about overconfidence and some studies that demonstrate its existence, raising theories from psychology.

However, you may still be wondering how does all of this fit into business, finance and economy?

You will find the answer in these articles:

Overconfidence in your decisions (Part 2)

Overconfidence in your decisions (Part 3)

We are Steering Bird, online advisers in business direction, management and finance. We specialize in business analysis, control and analysis of investment projects, results analysis, processes of budget and forecast, etc.

Contact us if you need help. We invite you to learn about our services and read our articles.

This article has been written in conjunction with the team of Tu Mejor Tú, Metas claras para el éxito. We invite you to visit their website, know their services, articles and to contact them if you need their help.

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