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The Joint Effect of Social Comparison and Social Distance on Evaluation of Intertemporal Choice Outcomes in Event-related Potential Studies
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Absolute Versus Relative Success: Why Overconfidence Creates an Inefficient Equilibrium.

Alice Soldà1, Changxia Ke2, William von Hippel3

  • 1Department of Economics, Heidelberg University.

Psychological Science
|September 20, 2021
PubMed
Summary
This summary is machine-generated.

Overconfidence in negotiations offers relative gains but leads to absolute losses. This bias creates inefficient outcomes where negotiators benefit individually at the expense of joint losses.

Keywords:
motivated beliefsnegotiationopen dataoverconfidencepreregistered

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Area of Science:

  • Social Psychology
  • Behavioral Economics
  • Decision Science

Background:

  • Overconfidence is a pervasive cognitive bias in social sciences.
  • Existing evidence on the costs and benefits of overconfidence is inconclusive.
  • The potential for relative benefits to outweigh absolute costs requires further investigation.

Purpose of the Study:

  • To investigate the causal effect of negotiators' confidence on negotiation outcomes.
  • To determine if overconfidence yields relative benefits that offset absolute costs.
  • To explore the impact of manipulated confidence on bargaining behavior.

Main Methods:

  • An experiment involving 298 university students in pairs.
  • Negotiations focused on the unequal allocation of a jointly earned prize.
  • Confidence was manipulated using a binary noisy signal.

Main Results:

  • High confidence levels resulted in relative benefits for negotiators compared to their partners.
  • Simultaneously, high confidence led to absolute costs, reducing overall earnings.
  • Overconfident negotiators achieved higher individual earnings at the expense of the dyad's total earnings.

Conclusions:

  • Overconfidence creates an inefficient equilibrium in negotiations.
  • Overconfident negotiators gain relative advantages but incur joint losses.
  • The findings highlight the detrimental impact of overconfidence on overall economic efficiency.