Well, they’re very good, anyway. The first is a 1999 gem by Philip Tetlock: “Theory-Driven Reasoning About Plausible Pasts and Probable Futures in World Politics: Are We Prisoners of Our Preconceptions?” (American Journal of Political Science 43(2): 335-66). The second is a 2005 piece by Erik Hoelzl and Aldo Rustichini: “Overconfident: Do You Put Your Money on It?” (Economic Journal 115: 305-318).
Tetlock’s piece explores the overconfidence of foreign policy experts on both historical “what-ifs” (“Would the Bolshevik takeover have been averted if World War I had not happened?”) and actual predictions (“The Soviet Union will collapse by 1993.”) The highlights:
One thing Tetlock didn’t do was make his experts put their money where their mouth is. Hoelzl and Rustichini’s paper strongly suggests that he should have. H-R re-ran a fairly standard experiment on overconfidence. Ordinary subjects took vocabulary tests (which could be easy or hard). They then got to vote for one of two options:
Option #1: You win if you are in the top 50% of distribution.
Option #2: You win with 50% probability regardless of your performance.
Notice: Option #1 must be worse for half the subjects!
In one version of the experiment, subjects were asked to imagine there was a $10 reward. In the other version, there actually was a $10 reward.
The big result: “Choice behaviour changes from overconfidence to underconfidence when the task changes from easy and familiar to non-familiar. This effect is significant when monetary payments are at stake and weak when they are not.” Percentage of subjects who voted for Option #1:
No Money | Money | |
Easy test | 63% | 64% |
Hard test | 56% | 39% |
Richard Thaler and other behavioral economists have argued quite aggressively that stronger incentives do not make people back away from their irrational beliefs. Hoelzl and Rustichini is a nice counter-example. In fact, they seem to show that people over-shoot! And at risk of sounding over-confident, if Tetlock’s experts had to bet real money on their predictions, I’m sure they too would have moderated their positions.
Oh wait, you want me to bet actual money on that? Then I’ll give it 75%.
READER COMMENTS
Mike Linksvayer
Jul 16 2005 at 3:42pm
It appears that participants in the second paper more accurately assessed their relative performance with no money.
Which of Thaler’s or others’ papers is the best place to get the “stronger incentives do not make people back away from their irrational beliefs” argument?
What are the implications of either of these papers for idea futures/prediction markets?
jaimito
Jul 17 2005 at 12:12am
If the prophets had to pay for being wrong, they would be less overconfident. According to the stories, in Oriental courts the Sultan or Chinese emperor used to behead the failed vizier. I wonder what that did for accuracy. It may have been a nice incentive.
spencer
Jul 17 2005 at 3:48pm
This reminds me of the old wall street comment that everytime a stock is traded someone has made a mistake.
Roger McKinney
Jul 18 2005 at 9:00am
These articles remind me of one that Fortune or Forbes carried back in the mid 90s that said arrogance was a main cause of the failure of large established companies like Sears. My personal experience tells me that most managers are overconfident even when large sums of money or the success of their business is at stake. One reason for the overconfidence is that managers surround themselves with yes-men and brown-nosers.
aaron
Jul 18 2005 at 9:48am
You seem awfully confident in these articles.
aaron
Jul 18 2005 at 10:04am
Now, what if the overall performance of participants determines the size of the prize?
deb
Jul 18 2005 at 5:31pm
Gerd Gigerenzer, a psychologist was the first to demonstrate the easy-hard reversal in overconfidence judgments. Hoelzl and Rustichini don’t cite his research. This is either outright plagiarism or extreme citational incompetence.
If you read Gigerenzer, you’ll see that the easy-hard reversal occurs even in the absence of monetary incentives. It might be stronger with monetary incentives, but your claim that it depends on incentives is false.
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