Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/56322
Authors: 
Cesarini, David
Sandewall, Örjan
Johannesson, Magnus
Year of Publication: 
2003
Series/Report no.: 
SSE/EFI Working Paper Series in Economics and Finance 535
Abstract: 
Experiments in psychology, where subjects estimate confidence intervals to a series of factual questions, have shown that individuals report far too narrow intervals. This has been interpreted as evidence of overconfidence in the preciseness of knowledge, a potentially serious violation of the rationality assumption in economics. Following these results a growing literature in economics has incorporated overconfidence in models of, for instance, financial markets. In this paper we investigate the robustness of results from confidence interval estimation tasks with respect to a number of manipulations: frequency assessments, peer frequency assessments, iteration, and monetary incentives. Our results suggest that a large share of the overconfidence in interval estimation tasks is an artifact of the response format. Using frequencies and monetary incentives reduces the measured overconfidence in the confidence interval method by about 65%. The results are consistent with the notion that subjects have a deep aversion to setting broad confidence intervals, a reluctance that we attribute to a socially rational trade-off between informativeness and accuracy.
Subjects: 
overconfidence
uncertainty
monetary incentives
experiments
JEL: 
C91
D80
Z13
Document Type: 
Working Paper

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