Content area
Full text
Two within-subject studies of business executives indicate that overconfidence in judgment is reduced when actual decisions are made. Subjects projected quarterly earnings for 50 firms based on reported earnings from the previous 12 quarters. They stated their confidence in forecasts, were given a $10 allocation and were allowed to invest in any, all or none of their forecasts. Subjects chose to act on a relatively small portion of their forecasts but were more accurate and better calibrated when making investment decisions than when making forecasts. The relatively more accurate subjects made more investment decisions and riskier decisions than the relatively less accurate subjects. This suggests that subjects had a sense of whether their knowledge was appropriate for decision making, and acted accordingly. Improved calibration for decision making (investments) compared to judgments (forecasts) appears to have been the result of an additional evaluation stage which occurred between making a forecast and acting upon it. Most subjects tended to 'think twice' before acting, which may have lead, to more thorough information processing and improved calibration.
Findings in the literature on overconfidence are wide-ranging and robust (Fischhoff, 1982; Lichtenstein, Fischhoff, & Phillips, 1982).1 Poorly calibrated decision makers are thought to make ill-advised choices based on sub-optimal information searches. Generalizing somewhat, decision makers tend to be overconfident for difficult problems and underconfident for easy problems (Lichtenstein & Fischhoff, 1977). Findings are not unequivocal with respect to experts. Some show significant overconfidence while others show reasonably well calibrated experts. Characteristics of the decision tasks may account for the differences (Keren, 1991 ). Weather forecasters, accountants and loan officers can be trained to be calibrated due to the clarity and timeliness of feedback while physicians, psychologists and strategists are more prone to overconfidence due to the perceived uniqueness of the circumstances at hand and the difficulty of learning from feedback under these circumstances (Christensen-Szalanski & Busheyhead, 1981; Hogarth, 1981; Oskamp, 1965; Russo & Schoemaker, 1992; Tomassini, Solomon, Romney, & Krogstad, 1982).
Relatively unaddressed in this research is the question of whether there is a difference between overconfidence with respect to judgments and overconfidence in decisions. Most studies of overconfidence require subjects to evaluate information and state their confidence level in judgments they would make from the information. The findings...