What do the following high-profile disasters have in common: World War I,
Vietnam, the war in Iraq, the collapse of the banking system, and underpreparedness
for natural disasters such as Hurricane Katrina?
According to Dominic Johnson at the University of Edinburgh and his pal
James Fowler at the University of California, San Diego, the answer is that
they have all been blamed on the all-too-human condition of overconfidence.
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The puzzle about overconfidence is its ubiquity. Many studies have shown that
most people have an exaggerated sense of their own capabilities, an illusion that
they have control over uncontrollable events and are invulnerable to risk. Most
people, for example, believe they are above-average drivers, a statistical
impossibility. We are all overconfident in one way or another.
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But how can such a condition have evolved when overconfidence can lead to destruction
of communities and catastrophic loss of life?
That’s a mystery that many experimental psychologists have wrestled with,
but now Johnson and Fowler say they have the answer. By creating a mathematical
model of the way overconfident individuals compete against ordinary
individuals, they show that there is a clear advantage in overconfidence.
In fact, if the potential reward is at least twice as great as the cost of
competing, then overconfidence is the best strategy. In fact, overconfidence is
actually advantageous on average, because it boosts ambition, resolve, morale, and
persistence. In other words, overconfidence is the best way to maximize benefits
over costs when risks are uncertain.
That’s an interesting insight. Experimental psychologists have long known of
the role of overconfidence in conflict situations and yet have been unable to
explain its origin.
But it is Johnson and Fowler’s predictions that are most worrying. Their
model implies that optimal overconfidence increases with the magnitude of
uncertainty. So the greater the risk, the more overconfident individuals should
become.
Johnson and Fowler use that finding to predict that overconfidence will be
particularly prevalent in domains where the perceived value of a prize
sufficiently exceeds the expected costs of competing.
What might these domains be? Johnson and Fowler highlight several, but
perhaps the most obvious and potentially dangerous are international relations,
where events are complex and distant and involve foreign cultures and languages;
new technologies such as the Internet bubble; and the banking industry, where
complex financial instruments abound. Any of that sound familiar?
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All of this sets the stage for the next question: how best to mitigate the
worst side-effects of rampant overconfidence in a society with a dramatically
exaggerated sense of its own abilities.