Emerging Technology from the arXiv

A View from Emerging Technology from the arXiv

The Evolution of Overconfidence

If overconfidence leads to global disasters such as bank collapses and world wars, how could it have evolved? Researchers have an answer.

  • September 24, 2009

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.

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.

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?

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.

Ref: arxiv.org/abs/0909.4043: The Evolution of Overconfidence

Tech Obsessive?
Become an Insider to get the story behind the story — and before anyone else.

Subscribe today

Uh oh–you've read all of your free articles for this month.

Insider Premium
$179.95/yr US PRICE

Want more award-winning journalism? Subscribe to Insider Plus.
  • Insider Plus {! insider.prices.plus !}*

    {! insider.display.menuOptionsLabel !}

    Everything included in Insider Basic, plus ad-free web experience, select discounts to partner offerings and MIT Technology Review events

    See details+

    What's Included

    Bimonthly magazine delivery and unlimited 24/7 access to MIT Technology Review’s website

    The Download: our daily newsletter of what's important in technology and innovation

    Access to the magazine PDF archive—thousands of articles going back to 1899 at your fingertips

    Special discounts to select partner offerings

    Discount to MIT Technology Review events

    Ad-free web experience

You've read all of your free articles this month. This is your last free article this month. You've read of free articles this month. or  for unlimited online access.