Absolute Versus Relative Success: Why Overconfidence Creates an Inefficient Equilibrium

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.